Canadians are now much deeper in debt than Americans
In the immediate aftermath of the financial crisis, Canadians were feeling pretty good about themselves. And that was their right.
Canada’s banks weathered the crisis well and bolstered their reputation as some of the world’s soundest financial firms. As US debt government debt levels surged, Canadian government bonds became an investor darling. And the Canadian economy bounced back faster than the US after the crisis, as Canadian consumers and borrowers took advantage of rock-bottom interest rates.
But then a funny thing happened. As the US has struggled with a half decade of piddling growth, housing foreclosures and a credit crunch, US household debt has dropped sharply. Meanwhile, Canadians continued borrowing. Check out this chart from Barclays which captures the dynamic.
Canada’s steady climb is worrisome. Earlier this year Moody’s chopped ratings on a slew of Canadian banks, citing “exposure to the increasingly indebted Canadian consumer and elevated housing prices.” In recent speeches, former Bank of Canada head Mark Carney—who will be taking over at the Bank of England shortly—has issued sharp warnings about the country’s over-reliance on consumer debt. (Never mind that the whole thing happened on his watch.)
What’s caused the spike? A report from published in the Bank of Canada Reviewsuggests that Canadians are responding to rising housing prices by borrowing against the value of their homes.
Significant gains in house prices over this period have eased borrowing constraints for some households by raising the amount of collateral available to support borrowing against home equity. Financial innovation that made it easier for households to access this type of borrowing has probably been another important factor.
Note the two scariest words in that excerpt: financial innovation. Practically every financial innovation since the birth of automated teller machine has involved banks making risky loans to people who can’t pay them back, and then watching the government pick up the tab.
The F effect
Days ago, when Sir Mark said the next rate hike was ‘less imminent’, a nation of realtors went bananas. Grasping at straws, they lurched from blog to blog spreading the message that interest rates were ‘on hold until 2014’. Or maybe forever.
Untrue, of course. Carney said nothing of the sort. Most economists I ride with fully expect the central bank to starting moving later this year. They also know (unlike most realtors) the Bank of Canada does not influence fixed-term mortgage rates, since banks fund those in the bond market. With the US on LowT therapy and stock markets advancing, bond prices have only one direction in which to travel. That means bond yields – and mortgage costs – will do the opposite.
But even that doesn’t matter. Right now it’s all about the kids.
It’s now been half a year since F did what this pathetic blog predicted three months earlier, and killed off the 30-year mortgage. But that was just the start. The feds also chopped the gross service debt ratio and murdered cash-back mortgages. The effect was to increase mortgage rates for first-time buyers by more than a full percentage point. At the time real estate boards said it was all irrelevant.
We know what happened. Sales from Vancouver to Halifax have taken a tumble, and nationally they’re lower by 17%. Construction in the GTA is falling rapidly, listings are expected to surge as spring arrives and sellers will be under pressure to cut deals or lose buyers. A huge amount of this comes from the impact wizened little F had on the virgins.
A new Re/Max survey (imagine me citing such an authority) makes the point clearly. Three years ago 43% of all real estate purchasers were first-time buyers – inexperienced, naive babes who coughed up a small downpayment and jumped into home ownership as prices started to crest. According to new data, only 30% of buyers over the next two years will be virginal – a most significant drop of 13%.
And what kinds of properties do these kiddies overwhelmingly buy? Right. The ones they can afford – condos. This reduction in demand is enough to stop the box-in-the-sky market in Toronto, Vancouver, Montreal and Calgary cold in its tracks. After all, this weekend there are 5,700 resale condos for sale in the GTA, and over 8,600 on the market in Greater Vancouver, plus all the thousands of presales being flogged.
There is absolutely no doubt that virtually every condo owner in every major Canadian city will lose equity in 2013. Those who bought with minimal downpayments will end up with mortgages larger than the market value of their units. This is already the case in Calgary, Edmonton and most of Vancouver. As the reality spreads, thanks to social media, the pool of buyers will shrink further. So, expect a slew of projects now in the planning, marketing and pre-construction phase to end up being puffs of smokes or parking lots.
By the way, this might interest you. Almost four in ten people who intend on buying a house in the next two years earn less than $ 50,000. In Toronto the average property (condos included) costs $ 459,780. In Calgary it’s $429,648 and $ 590,800 in Vancouver. That’s a ratio of eight to twelve times income, which brings us to a conclusion even Re/Max reached: prices in most places have risen twice as fast as incomes. So, to restore 2009 market momentum, one of three things has to happen. (a) Wages and salaries take a flying leap higher. (b) Real estate prices fall by about a fifth, at least. (c) Or, F crumbles and brings in 50-year amortizations and free downpayments with every TFSA opened.
Now, which one of those do you think has the greatest likelihood of happening?
But wait! The realtors have unearthed another key finding – “Just over 80 per cent of buyers believe housing values in their area will rise or remain the same.”
OMG. This will be wicked.
Britain’s suffering its worst housing crisis in modern history – with the number of new households increasing faster than the number of homes it can build. Over 1.7 million families are waiting for a place to live. RT LIVE rt.com Subscribe to RT! www.youtube.com Like us on Facebook www.facebook.com Follow us on Twitter twitter.com Follow us on Google+ plus.google.com RT (Russia Today) is a global news network broadcasting from Moscow and Washington studios. RT is the first news channel to break the 500 million YouTube views benchmark.
Video Rating: 4 / 5