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While we wait for the July Canadian housing data to trickle out, let's return to Japan and their housing price experience after nearly 20 years of ZIRP and NIRP. I have posted charts about Japan since 2012 to illustrate the folly of global central banks and their monetary policies of instituting ZIRP & NIRP to stimulate inflation > consumption > production, the by-product of which, has been the manic search for yields as the underlying asset class values became stretched to perfection under pressure from the FOMO crowd. Instead of using fiscal policy which requires long term planning and socially cohesive agreements directed towards production and well being, the quarterly knob twiddling monetary policy has in part, along with the rise of a digitized global financial network, unleashed "megabyte" money laundering which the UNODC  estimates at 2-5% of global GDP per year. It has also crushed the incentive to save for a future funding of investment into productive assets.   The Household Saving Rate in Canada has decreased to 1.1% in the first quarter of 2019. ​​

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​Commodity Super Cycle - 10 Years into the Bear

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Here is a chart I published in a 2012 post "What Do You Do During a Housing Bust". The answer is "save". ​ If the CRB chart above has correctly identified a cyclical swing between bull and bear commodity production, then we should expect another "lost decade" of balance sheet repair especially in the over-speculated and now depreciating housing asset markets of Canada.

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​A Housing Bubble "doesn't just warp the real estate market, the knock-on effects can throw a region's entire economy into disarray."
Bloomberg via Visual Capitalist

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House Price to Rent Ratio ... Canada Ranks 2nd
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House Price to Income Ratio​ ... Canada Ranks 2nd
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Real House Prices ... Canada Ranks 3rd
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Household Debt to GDP​ ... Canada Ranks 5th

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CLICK CHART TO ENLARGE CLICK CHART TO ENLARGE ​Full CMHC 33 page 3Q 2019 PDF Report Here.​

​CMHC launched a new report earlier this week that will focus on mortgage market trends in Canada on a quarterly basis. This first report entitled "Mortgage Market Slowing & Share of Uninsured Mortgages Increasing" indeed highlights 2 major trends in place: Since the 2016-2017 peak of the FOMO frenzy that pushed housing prices in the hot Canadian markets to the most un-affordable global levels (Demographia), uninsured mortgage growth has grown more than three times that of insured mortgage growth. Since the late 1980's after fixed mortgage rates peaked at over 20% per year in 1981, the rate of GROWTH in mortgage creation in Canada has plunged to less than 5% Y/Y now even though nominal mortgage rates have been boot stomped via NIRP and ZIRP. #1 above suggests that housing unaffordability continues to grow as fewer potential buyers can qualify for a high ratio debt to equity insured mortgage. ​#2 suggests that reducing mortgage rates by 75% over the last thirty-plus years has led to debt revulsion as identified in my Household Debt chart which shows a peak and flattening since the hot market price peaks of 2017​

...History has shown that it takes a “long, long” time to restore household balance sheets, a situation that will be all that more difficult with trade and business spending hampered...
David Tulk, International Portfolio Manager for Fidelity Investment Canada, March 2019​

...The nation may already be in recession after growing at an annualized pace of just 0.4 per cent in the fourth quarter (2018) and a pretty “soggy” start to the year (2019)...
David Wolf, Asset Allocations for Fidelity Investment and Former adviser to the Bank of Canada

...Canada’s households are clearly more stretched in terms of debt and spending than their American counterparts... There’s just no latent capacity to spend or to buffer a shock in Canada... They just have less room for error, less room to cushion any kind of hit with spending, before they would actually fall into outright dissavings...
​Eric Lascelles, chief economist at RBC Global Asset Management Inc

Source of Quotes above from Financial Post.com June 2019

Meanwhile David Rosenberg May 2019
The investor class is heading towards liquidity
in the form of U.S. Treasuries and the USD

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Image slide show below of the 3 charts above.

​St. Louis Fed June 24, 2019 Recession Notes

​
By William Emmons, Lead Economist, Center for Household Financial Stability
Federal Reserve Bank of St. Louis June 24, 2019

As of late 2018, four housing indicators that had signaled each of the three most recent recessions were on a track consistent with a late 2019 or early 2020 recession. They are:

30-year fixed mortgage rates
Existing home sales
Real house prices
Contribution of residential investment to GDP growth

What Might These Four Housing Indicators Be Signaling?
The recession signal provided by several key housing indicators in late 2018 strengthened in early 2019 in the sense that their cyclical behavior is well within the range traced out in the run-up to the three most recent recessions. Combined with movements in other indicators with good forecasting track records (such as the inversion in the slope of the Treasury yield curve), these housing measures suggest an above-average risk of recession within the next few quarters. Of course, the onset of the next recession is unknown.

​The New York Fed Agrees

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The New York Fed’s recession probability model is currently warning that there is a 30% probability of a recession in the next 12 months. The last time that recession odds were the same as they are now was in July 2007, which was just five months before the Great Recession officially started in December 2007. July 2007 was also when Bear Stearns’ two subprime hedge funds lost nearly all of their value, which ultimately contributed to the investment bank’s demise and the sharp escalation of the U.S. financial crisis.  Read Whole Article

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The Canada Mortgage and Housing Corp. (CMHC) defines a household as being in “core housing need” if it “falls below at least one of the adequacy, affordability or suitability standards and would have to spend 30% or more of its total before-tax income to pay the median rent of alternative local housing that is acceptable (meets all three housing standards).” thecanadianencyclopedia.ca

"estimated that approximately 35,000 Canadians experience homelessness on any given night, and at least 235,000 Canadians are homeless in any given year."​ AND  According to the Canadian Observatory on Homelessness, mass homelessness in Canada emerged around this time (1987 Conservatives) as a result of government cutbacks to social housing and related programs starting in 1984 (Conservatives). In 1993 (Liberals), federal spending on the construction of new social housing came to an end. In 1996 (Liberals) the federal government transferred responsibility for most existing federal low-income social housing to the provinces.

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​Conclusion from Statistics Canada’s Insights on Canadian Society.

Using data from the 2016 SFS, this study looked at the association between the debt-to-asset and debt-to-income ratios and financial distress, while controlling for various socioeconomic characteristics. Three financial distress indicators were considered—missing non-mortgage payments, missing mortgage payments and taking out a payday loan.

The varied results call for a nuanced interpretation. The first point to note is that the debt-to-asset ratio tells a more consistent story than the debt-to-income ratio. Across all three distress indicators, people in the highest debt-to-asset groups have a higher probability of reporting distress. However, after controlling for other factors, the debt-to-income ratio is not associated with the measures of financial distress since the results are not statistically significant.

The debt-to-asset ratio might be a more predictive indicator because debtors can often sell assets to make debt payments, even if they do not have the income to make payments. Alternatively, those who own homes often have access to home equity lines of credit. These results are important because they suggest that the debt-to-asset ratio is a better indicator of financial precariousness than the debt-to-income ratio.

Additionally, some demographic groups face relatively higher probabilities of reporting financial distress, including lone-parent families, and “other” family types. Conversely, families whose major income earner had a university degree, were less likely to be in financial distress. Similarly, homeowners with or without a mortgage were less likely to miss payments or take out payday loans.

Financial distress has many dimensions and can take multiple forms. Future measurement should provide additional details, such as the frequency at which specific financial services are used when under financial duress. More research will be needed to better comprehend the extent to which Canadians are facing financial difficulties.

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​As Cities Grow, So Do the Numbers of Homeless Joseph Chamie, July 13, 2017 Homelessness is a mark of failure for communities in providing basic security. Based on national reports, about 2 percent of the world’s population may be homeless. Another 20 percent lacks adequate housing, reports demographer Joseph Chamie. Such statistics come with a caveat. Obtaining accurate numbers is difficult, mostly due to wild variations in definitions around the globe. Also, measuring homelessness is costly: Cities may under-count due to embarrassment while individuals avoid officials due to shame and fear of arrest and harassment. Reasons for homelessness include “shortages of affordable housing, privatization of civic services, investment speculation in housing, unplanned and rapid urbanization, as well as poverty, unemployment and family breakdown,” Chamie explains. “Also contributing is a lack of services and facilities for those suffering from mental illness, alcoholism or substance abuse and displacement caused by conflicts, natural disasters and government housing policies.” Even people with jobs can struggle to keep homes. As experts debate whether the issue can be resolved or not, some governments offer support programs while others do what they can to chase the homeless off to other locales. – YaleGlobal

Prominent Canadian economist David Rosenberg is warning that record household debt levels in the country will hinder economic growth...
​(ie: your income, your cash flow, your ability to service your debt)

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​Bill Gross of Janus Capital commented on... his recent investors’ letter (emphasis added is ours Macro-Ops.com): ​“What readers should know is that the global economy has been powered by credit – its expansion in the U.S. alone since the early 1970’s has been 58 fold – that is, we now have $58 trillion of official credit outstanding whereas in 1970 we only had $1 trillion.”

​There is a phase in the debt cycle when revulsion sets in.

​At the end of the business cycle there are three forces at work:
1) Rising interest rates sap demand and raise the cost of capital.
2) At the same time, according to capital theory, future returns decline due to over capacity.
3) While demand is decreasing and there’s a glut of supply, the herding nature of market participants create euphoric sentiment that drives expectations (and market prices) well past likely outcomes.
This process is what forms a market top. Alex Barrow Co-Founder of Macro Ops

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The household debt service ratio, measured as total obligated payments of principal and interest on credit market debt as a proportion of household disposable income, edged up to 14.9% in the first quarter (2019), as total obligated debt payments grew at a faster pace than disposable income. Mortgage interest payments (+4.0%) have outpaced mortgage principal payments (-0.4%) as a result of higher interest costs, continuing a trend since the second quarter of 2018. Household credit market debt as a proportion of household disposable income remained at 177.6% in the first quarter, as debt and income grew at similar rates. ​In other words, there was $1.78 in credit market debt for every dollar of household disposable income. ​StatsCan June 13, 2019, ​

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Ray Dalio's Economic Machine

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​While we wait for the June real estate stats to come out, let's look at the relationship between WTI Oil prices and real estate in Canada. The top chart shows the WTI oil prices dropping into month end lows and as the inset seasonal chart shows, the drop is happening when the price variability is at one of the four low points in the year which suggests this year may not be much different. Now look at the Canadian scene via the TSX cash markets in the chart below. As the chart plots since 2015 demonstrate, when the energy sector price drops so does the real estate sector. These cash markets react quickly to changes "on the ground" and are not restricted by the handicap of finding a buyer.  The relationship between oil prices and real estate are clearly seen in the Calgary housing chart with its total sales plot and the TSX Energy plot overlays, both of which have been descending since 2013 while the energy plot itself has been dropping since the July 2008 peak. It also shows up on my chart of TSX indexes for Energy, Real Estate, Financial Services and Gold... and gold is maybe leading the way for another leg down. Gold heading down makes sense since the U.S. Dollar (my chart of Canadian real estate in USD)  has been rising since 3Q 2017 and a high USD/CAD ratio can quickly unwind marketplace sentiment when it comes to a speculative commodity which real estate has been transformed into with the global suppression of leverage costs.   ​

​Oil Breaks Down: Should Stock Market Bulls Be Worried?

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From CHRIS KIMBLE, technical market analyst:

A couple of weeks ago, I wrote an article about crude oil’s recent correlation to the S&P 500 (stock market) and that its initial move lower may be sending a bearish signal to stocks. Since then, crude oil has fallen sharply through its up-trend line, sending a bearish message to Oil bulls.

Is the S&P 500 the next to fall?

Below is an updated chart of Crude Oil showing the multi-month downtrend (1), and the ultimate break down through its near term up-trend line (2).

More importantly, from a pattern perspective, Crude Oil is putting in a large weekly reversal bar (bearish). This warrants watching as Crude Oil and the stock market remain highly correlated since their peak in October. Stay tuned!

Thanks to Chris Kimble for the chart above; get a FREE TRIAL to his work.

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...the stock market plays a significant role in influencing the growth and/or reduction in volatility and market risk.

...the health of the stock market acts as a bellwether for a variety of purchasing decisions made by consumers across the domestic economy.

...in a falling stock market, however. As the number of prospective buyers decreases, it is possible that banks will alter their lending policies to woo individuals from an ever-decreasing pool of prospective buyers.

...we can see how changes in the stock market do influence the mindset and eagerness of home buyers. With that in mind, people who are ready to buy a home should watch the stock market to determine whether or not they are able to leverage market volatility to their advantage during their negotiations with banks.

The above quotes are from Does the Stock Market Affect the Housing Market? By: Ryan Cockerham | Reviewed by: Ashley Donohoe, MBA; Updated March 06, 2019 via Zacks.com

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GM bought Cruise in 2016 for $1 billion to jump-start its self-driving efforts. The company has said it plans to deploy its fully driverless cars, without steering wheel or pedals, for commercial ride-hailing use as early as 2019. The Verge May 7, 2019

Engineering - Autonomous Vehicle Hardware & Software +/- 90 positions 
Engineering - Product & Infrastructure +/- 70 positions
Executive Support 3 positions
Finance & Strategy 5 positions
Global Customer Support 1 positions
Global Vehicle & Market Operations 6 positions
Legal & Government Affairs 2 positions
Marketing & Communications 6 positions
People +/- 35 positions
Product Management and Design 11 positions
Product Operations 2 positions

​‘Maxed out’: 48% of Canadians on brink of insolvency, survey says.

Whaaaat?

48% - of Canadians are $200 or less away from financial insolvency every month.

35% - say an interest rate increase would move them towards bankruptcy.

54% - worry about their ability to repay debts. 

40% - said they won’t be able to cover all living and family expenses in the next 12 months without taking on more debt. 

​55% - say they are $200 or less away from the financial brink in Atlantic Canada.

51% - say the same thing in Quebec.
​
48% - say the same thing in Ontario.

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​But this is not new news because since the July 2008 commodity peak, the Canadian Balance of Trade has been negative for 77% of the time (monthly prints). Also the Federal Direct Investment metrics have been negative for the last 20 years and the spread has widened in the last 3. CLICK CHART TO ENLARGE

...and the Yield Curve

The flattening of the yield curve is a signal from the bond market that it is worried about the economy and its ability to continue to grow. In addition, it is a signal that future inflation is nowhere to be seen. One outcome of an inverted yield curve is a weakening in bank lending as banks begin to earn less profits from making loans. In the most recent earnings announcements, the banks have already made this clear as they expect net interest margins to contract. This is because a bank’s role is to borrow funds at usually lower short-term rates and lend those funds at usually higher longer-term interest rates. The spread between these two rates represents the banks’ profits.

However, with an inverted yield curve, the spread between the short-term and long-term rates narrows and the banks’ incentives to lend are greatly reduced. Not only is the profit margin eroded by the yield curve, but the banks could become worried about the possibility of an economic slowdown. As banks become less incentivized to extend credit (make loans) to their customers, it results in a vital lifeline of the economy being choked off. PacificaPartners.ca

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