 CLICK CHART TO ENLARGE Canadian Subordination This chart is from the August 2013 IMF study "The Driving Force behind the Boom and Bust in Construction in Europe" Prepared by Yan Sun, Pritha Mitra, and Alejandro Simone. The Canadian population, in both public and private sectors, has been extremely dependent on housing as a percentage of GDP, well over 15% in 2011 compared to the U.S. and Germany at less than 5%. The current Canadian fiscal policy is to balance the budget by 2015–16 which means somehow getting more revenue, spending less or both. As the IMF report observes: As a control variable, government capital expenditure is significant, reflecting the large portion of government capital investment in infrastructure. The March 2013 Budget does provide a large spending carrot of $53 billion over 10 years but that is not scheduled to start until 2015 which I presume is AFTER the budget is balanced. Meanwhile as we know CMHC has reversed its policy of "every one in the pool". Now the advice from governance is to get back to work, shed the excess debt and stop flipping real estate because as the IMF study notes: A rising construction share during the boom time means construction grows faster than GDP, and a sharp decline during the recession reverses the process. Canadian GDP (1.4% as of 1Q 2013) has been in a downtrend along with other developed countries for the last 50 years. So if the Canadian government is going to balance the budget in the next 2 years on declining GDP, then my guess is their plan for spending $53 billion is not going to start on schedule. Here are some more quotes from the IMF study: Most of the cyclical patterns in construction are similar to the business-cycle characteristics of investment in the macro-economic literature. For example, in a comprehensive study of 71 post-war US macro-economic time series, Stock and Watson (1999) found that investment in structure, especially residential structure is highly volatile and pro-cyclical. They also noted that employment in contract and construction is more than twice as volatile as the cyclical component of real GDP. For advanced economies, the dependency ratio negatively affects the construction share. Dependency ratio affects construction through a few different and possibly competing channels. For example, a population with a high dependency ratio will have higher number of families. This will tend to increase demand for residential housing. On the other hand, high dependency ratio reduces household earning and thus housing affordability, depressing demand for housing. Our results suggest that overall, a higher dependency ratio may reduce housing affordability enough that demand for construction is reduced. We're there folks: Canadian housing starts edge lower in July. Total Canadian urban housing starts fell 2.1% in July. Single-unit starts fell 5.5%. "Urban starts increased in British Columbia but fell in all other regions, including Atlantic Canada, the Prairies, Ontario and Quebec, CMHC said."
 CLICK CHARTS TO ENLARGE Here's Mother Nature... ...next comes Mr Margin. Yesterday Canadian mortgage lenders hiked their posted lending rates up 10 to 30 beeps depending on the loan. The last "posted" rate move was 5 months ago of 10 bps down and 10 months before that it was 10 bps down. A fearful symmetry is at work with all eyes on the bond markets. In any event we have had ZIRP for well over 4 years so this hike in retail rates is welcomed by savers to the dismay of borrowers and reflects perhaps a twitch of restlessness in the herd. Or maybe it's just a good time to widen the spread and sell some mortgage paper to get it off the books. The CBC covered the gory details and I quote in part: Rising rates push up the average monthly costs faced by homeowners... That's money homeowners won't have to put into other spending, including cars and home improvements. The last sentence quoted from Mr Flaherty is funny because after World War II, the Canadian Government got into the business of insuring mortgages to "facilitate access to affordable housing" (Wikipedia) and has been playing footsie with lenders for decades and this current government has been an active agent in shielding lenders from risk.
Yes, buyers have to take responsibility for assuming historic levels of debt, but our governing policies are at the center of this enormous bubble of debt that requires transformation into equity by repayment or default. If mortgage lenders did not have tax payer funded insurance against default, then bad credits and poorly qualified buyers would never be able to bid up prices and housing costs would not go through the roller coaster ride of boom to bust. Instead the bond markets would do their job with Mr Margin working full time controlling risk and there would be no need to have Mother Nature look in on us. But here she is.  CLICK TO ENLARGE CHARTS Cash Buyers Defenestrate Not only in the U.S. but cash buyers of real estate investment stocks and trusts (REITs) in Canada, Europe and Asia (IYR, FTY, PSR, RWO, IFGL) have been selling the July 2013 peak. And now in August the "Chinese buy real estate at any price" Guggenheim AlphaShares China Real Estate ETF (TAO) looks to have joined the cash exit window.  CLICK CHART TO ENLARGE Kiss and Tell Cash Index "This key sector (Housing) had a huge impact on the broad market in 2007/2008. Will the price action result in a different outcome this time?" Chris Kimble goes on to make the point that: Home builders created a bearish wedge in 2006, broke support, rallied to "kiss the underside" of resistance then proceed to fall over 80% in value and the broad market followed.  CLICK CHART TO ENLARGE CMHC is YOU Tax Payer The Globe and Mail reported August 12, 2013 that "Three-quarters of all Canadian mortgages are insured by the federal government, up from only 30 per cent in 1988." ... "Ottawa guarantees a total of $900-billion worth of mortgage insurance." ... "It has been a no-brainer for the banks." Lenders have used up nearly 80% of this year’s available government guarantee by July 31, 2013. In the Globe & Mail article, the author Barrie McKenna points out:
No Risk means No Due Diligence eh Canada? Corporate bond manager Canso Investment Counsel Ltd. of Richmond Hill, Ontario estimates: "...that the combined impact of successive federal programs may have added as much as 50 per cent to house prices in key markets, such as Toronto. Canso estimates that the “affordable” price of an average two-storey home in upscale North Toronto is $615,000 – well shy of the actual price of $900,000." Subtract 50% off of average Vancouver SFD house prices from the peak and you get $532,499 which puts it right into the PLUNGE-O-METER target zone. 50% off of Toronto (GTA) peak average SFDs and you get $338,398. 50% off of Calgary peak average SFDs and you get $263,581. In Canso's June Newsletter is a chart showing the comparison of housing as a percentage of GDP between Canada and the USA. Canada is overdependent on residential investment. So was Spain.  CLICK CHART TO ENLARGE  CLICK CHART TO ENLARGE Unemployment Ticks Up Canada's jobless rate now 7.2% "...it does look like there's been a little bit of deterioration since the start of the year." said Doug Porter, Bank of Montreal chief economist. "In all, six of 10 Canadian provinces lost workers with Quebec's 30,400 setback the deepest fall-off."  CLICK CHART TO ENLARGE "The agency (Bank of Canada?) pointed out that for the first half of 2013, job gains have averaged 11,000 a month.
That's far weaker than the 27,000 average gain the economy produced during the second half of 2012." "It is also not sufficient to fill vacancies created by the natural growth in the labour force, which analysts estimate is between 15,000 and 20,000 a month. Under this scenario, it should be expected that the unemployment rate will rise unless a large number of discouraged Canadians drop out of the workforce altogether." Quotes above from the Huff Post August 9th and the Montreal Gazette August 10, 2013 NOTE: It's the Canadian Energy sector that is attracting the unemployed migration. See the June 27, 2013 post "Hours vs Earnings" |
History, Charts & Curated Readings"Progress, far from consisting in change, depends on retentiveness. When change is absolute there remains no being to improve and no direction is set for possible improvement; and when experience is not retained, as among savages, infancy is perpetual. Those who cannot remember the past are condemned to repeat it." George Santayana Vol. I, Reason in Common Sense Archives
August 2019
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"History, real solemn history, I cannot be interested in.... I read it a little as a duty; but it tells me nothing that does not either vex or weary me. The quarrels of popes and kings, with wars and pestilences in every page; the men all so good for nothing, and hardly any women at all - it is very tiresome." Jane Austen spoken by Catherine Morland in 'Northanger Abbey'
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