HISTORY & READINGS at Brian Ripley's Canadian Housing Price Charts & Plunge-O-Meter

Anti-Trade Vancouver Edition

12/19/2016

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The Premier of BC Christy Clark is in the news again with her pre-election enticement of no interest loans for 60 months of up to $37,500 to wannabe buyers who need a bigger cash down payment to qualify for a mortgage to purchase real estate in BC's absurd housing market that has been on ice since the summer. BNN Dec 16, 2016

The chart mashup above was prompted by an observation from a reader (S.B.) that the technical structure of the Vancouver housing market is now within momentum levels for a trend change to the downside as soon as the next retest and failure of the recent highs completes; the setup being the "anti-trade". S.B. made earlier observations here "3 Vancouver Views" Sept 2016 and "Simple as ABCD" May 2016; thanks SB.

The evidence of serious downward repricing has this provincial government attempting to goose the demand side of the market with free ZIRP money provided by you and me dear tax payer. Not only will we tax payers supply the down payments to people who don't qualify under the already sub prime CHMC lending standards, but we are additionally collectively subsidizing the banking and mortgage industry that has little or no lending risk and we are continuing to feed the provincial government tax collector via the property transfer tax. "In total the property transfer tax brought in $1.53 billion for the government, $605 million more than budgeted" said BC Finance Minister Mike de Jong CBC NEWS July 2016.

Ontario and Toronto are also implelled to goose the fence sitters into buying into the market:

Ontario land transfer tax rebate doubled to $4K for first-time homebuyers. City News November 2016.

Ontario’s land transfer tax rises from 0.5 per cent on the first $55,000 of a purchase price to two per cent for everything above $400,000. Toronto’s land transfer tax is one per cent on the first $55,000 and two per cent on the rest. Toronto offers rebates of up to $3,725 for first-time homebuyers.

Sousa also announced a freeze in the property tax on apartment buildings while the government reviews how the tax burden affects rental market affordability. (Will landlords pass this along to tenants?)

Taxation and picking electoral sectors to reward or punish has created overly complex bureaucracies that exist in their own bubbles far removed from those they claim to serve. Every election brings new promises of reform (kiss that recent electoral reform goodbye) and at some point in the election cycle we hear that tax reform is on the agenda but reform never seems to make the cut. We may have to wait for a new generation of engineers armed with big data and new algorithms to simplify the tax structure. My favoutite is The Automated Payment Transaction Tax. It would do away with the tax department and with having to pay for the accounting and filing of overly complicated annual tax filings. The problem in this country is not the absence or lack of money creation.

Political ideology at all levels of government since the post war "invention" of CMHC has destroyed any possibility of a social contract that includes affordable housing as a basic right of tax payers. It appears to me that governments at all levels in Canada will continue to promote and urge Canadians to add even more household debt to their balance sheets that are already at historic levels nationally and globally. Although the Federal Government appears on the surface to be more rational than the provincial governments by warning Canadians who already have high levels of debt, they are not concerned with Canadian Banks who continue to be sheltered by tax revenue from the private sector. What they are concerned with is a RECESSION and THEIR OWN FEDERAL CASH FLOW. Is it irony or finger wagging and buck passing? The government is hooked on the commodification of real estate; it's a cash cow with a golden udder of debt that we are all attached to.

Here is the Federal Government at work:

CHMC Promotions Oct 2016 by the Globe and Mail

1992 Allow RRSP withdrawals for home purchase.

1999 Allow purchase with only 5% down payment.

2003 Remove house price ceiling on insured mortgages.

2003 "Green" mortgage insurance premium reduction and environmental incentives.

2005 Self Employed can self declare a 15% gross up of income and access all mortgage insurance products.

2005 Amortization increased to 30 years on insured mortgages.

2006 Amortization increased to 35 and 40 years on insured mortgages.

Warning from the Bank of Canada:
Risk of household financial stress and a sharp correction in house prices.

Some notes from the Satyajit Das videos below:

Real growth was produced from the Industrial Revolution.
But since the 1980's, growth has been fuelled by debt.
An asset's income should pay for its debt.
In the 1950's $1 to $2 of debt paid for $1 of GDP.
By 2007-2008, $4 to $5 of debt paid for $1 of GDP.
China in 2016 needs $6 to $8 of debt to pay for $1 of GDP.
In the 20th century, population doubled and was an organic driver of growth. Now population does not drive growth.
Innovation contributes to growth but productivity is falling.
Now we have a service economy not a productive one.
Innovation rates are falling dues to lack of R&D funding.
We cannot repay debt without growth.

As I like to say, if you are going to take on a large mortgage to buy property, make sure your cash flow from rents or employment is amortized for the same length of time that your debt is. The government can always raise taxes, but can you raise your income?

Property is an illusion by Satyajit Das

The End of growth as we know it by Satyajit Das - Key themes of his new book "A Banquet of Consequences"

Uncertain Uncertainties

10/13/2016

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"Whatever the cause..."
The WTO in their concluding paragraph from their September 27, 2016 Trade Statistics and Outlook is not sure why global trade growth is declining.

A number of reasons have been advanced to explain the decline in the ratio of trade growth to GDP growth in recent years, including the changes in the import content of demand, absence of trade liberalization, creeping protectionism, a contraction of global value chains (GVCs), and possibly the increasing role of the digital economy and e-commerce, but all have likely played a role. Whatever the cause, the recent run of weak trade, and economic, growth suggests the need for a better understanding of changing global economic relationships. The WTO, and other international organizations, are working hard to understand this current evolution and its implications for continued growth.

The bottom line is that the buyer sets the price and if the vendor agrees, the sale completes. The pitiful Softwood Lumber embargo is a case in point CBC News October 13, 2016. The U.S. does not want Canadian lumber at Canadian prices.

Notice on the WTO chart above that despite the last 90 months of ZIRP & NIRP, global trade growth relative to GDP has recently plunged and both variables have been well below their respective highs all during that 90 month or 7.5 year period. State promotion of credit expansion has worked perfectly at expanding credit and now the borrowers have the job of turning debt in equity via the long process of amortization or the quicker route of liquidation. If borrowers are preoccupied with debt repayment as the competition for income (sales) increases then sellers better plan on more price and currency competition as well.

The WTO projects that export growth in 2016 from North America will drop from their April 2016 guess of 3.1% to their current forecast of 0.7%.

I have been tracking Household Debt, GDP, Foreign Direct Investment and Balance of Trade and it's clear that for the last nearly two decades, net investment capital is outbound from Canada and in the last 7.5 years of ZIRP & NIRP, Canadian net trade has been mostly negative.

Investment capital travels to where the returns are high relative to risk. The cost of Labour is a key expense and sleepless AI labour is a direct competitor. ITEM CBC News June 15, 2016 "42% of Canadian jobs at high risk of being affected by automation, new study suggests"

On a provincial basis, Ontario has the lowest proportion — 41.1 per cent — of jobs at high risk of automation, while P.E.I. has the highest with over 45 per cent of jobs at high risk of automation over the next 10 to 20 years.

My affordability page has always used the Bank of Canada "bank rate" as an input for debt service ratio calculation. My back of the napkin calculation for a current stress tested 5 year term, 25 year amortization fixed mortgage relative to average provincial earnings is that in Vancouver 5.5 wage earners are required to qualify for an 80% loan to value mortgage when buying an average priced single family detached house. In Toronto 3.3 buyers are required. In Calgary 1.6 earners and in Montreal 1.1 earners are required.

The current levels of peak housing prices in Vancouver and Toronto requires much more labour input from a labour pool that must compete for income not just locally but globally as well and that competition is going to won by those with better education and mobility resources than their peers.

For those of you thinking of getting off the grid, here you go, the home farming robot:

Bob Dylan wins Nobel Prize for Literature
BBC News October 13, 2016

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The world’s first commercial drone delivery service has launched in Rwanda. The service is operated by Zipline, a US robotics and drone company who will make between 50-150 deliveries per day to 21 clinics in the western half of the country. QZ.com Oct 14, 2016

Good or Bad Boom

2/23/2016

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The aging boom in real estate has been fabulous for sellers unloading risky and depreciating assets. A recent study of "good and bad booms" (abstract below) suggests that as productivity declines over an aging boom, the risk of insufficient collateral becomes evident. The U.S. productivity chart has momentum relative to Canada's.

Abstract: Good Booms, Bad Booms
by Gary Gorton and Guillermo Ordoñez, February 2016
NBER Working Paper No. 22008

Credit booms are not rare and usually precede financial crises. However, some end in a crisis (bad booms) while others do not (good booms). We document that credit booms start with an increase in productivity, which subsequently falls much faster during bad booms.

We develop a model in which crises happen when credit markets change to an information regime with careful examination of collateral.

As this examination is more valuable when collateral backs projects with low productivity, crises become more likely during booms that display large productivity declines. As productivity decays over a boom as an endogenous result of more economic activity, a crisis may be the result of an exhausted boom and not necessarily of a negative productivity shock. We test the main predictions of the model and identify the component of productivity behind crises.

Canada has a population total similar to California's and yet California's GDP is +/- 1.3 times that of all of Canada's (Wikipedia). Canadians don't produce as much stuff as Californians do and with the energy and resource sectors deflating, I suspect Canada's "information regime" is going to change abruptly if it has not not already. Loans officers are going to be actually looking at the collateral underlying the loan instead of green lighting every manic bid this rising market proposes.

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HAT TIP to Jason Kirby, Macleans.ca for his "The most important charts for the Canadian economy in 2016" and the following two charts that underscore the risks of the "bad boom".

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Canada needs stronger business investment
Glen Hodgson, Conference Board of Canada

“2015 was another mediocre year for the Canadian economy, growing by only 1 per cent in 2015 after a technical recession in the first half of the year. The weakest aspect of Canada’s economy this year was the feeble performance of private investment, projected by the Conference Board of Canada to contract by nearly 8 per cent compared to 2014 levels. Much of this contraction is due to the sharp pullback in investment in the oil patch, now expected to decline by 40 per cent over the course of the year. That result for 2015 is depressing enough—but as the chart shows, Canada’s poor private investment performance in 2015 was not a one-time thing.

There’s more to this story than just low oil prices as Canadian firms continue to sit on mountains of cash embedded in their balance sheets. As a result, it is no surprise that we are in the midst of a multi-year period where growth in private investment is weak—the lagging edge of our economy—with little sign of a significant turnaround in 2016. A prolonged period of little or no real growth in private investment is bad news for productivity growth, since it suggests we are missing opportunities to invest in new technology, build our productive base and boost the competitiveness of the Canadian economy. What could prompt stronger investment growth? The growing U.S. recovery should boost demand for Canadian exports and eventually cause firms to invest in order to expand their productive capacity and seize the available export opportunities. But until there is evidence that Canadian firms are responding to a stronger order book, private investment will remain the lagging edge of our economy.”

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Global GDP is slumping
Bob Hoye, Institutional Advisors

“The graph of global nominal GDP runs from 1981 to date and covers another “new era” of financial manias. Our era has been fabulous as reckless adventurers have dominated financial markets as well as central banks. As with previous examples, the action has been mainly in financial assets with real estate prices soaring in the financial centres. Although the experiment in ambitious policy has seemed without limit, there was a severe setback in 2009.

The alert to the “Great Recession” was classic. Credit spreads reversed to widening in June 2007 and commodities reversed to weakening in June 2008. The rest as the saying went, was history. At -5 per cent, the current slump in global GDP is almost as severe as the one in 2009. This was preceded by the reversal in credit spreads and weakening commodities that began in June 2014. Central bankers have been charged with preventing contractions. This diminishes perceptions of risk and accounts get leveraged. Throughout history margin clerks have always trumped central bankers. This time around, central banks are highly leveraged.”

Bob Dylan - Things Have Changed

Credit Cycles

12/10/2015

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First In ~ First Out

According to StatsCan, in 2001 after the dot.com blowout and the markets then turned to commodities, there were +/- 329,129 employees working in the Oil, Gas & Mining industries per year in Canada and in full year 2014 that number had increased by 60.8% to 529,248.

This includes "support activities" but not the peripheral jobs in the general economy that depend on the spending by those oil, gas and mining employees.

In the chart above, the top panel shows U.S. non-financial corporate debt to GDP at levels where credit defaults start hitting the front page. The lower panel shows the cumulative flow of investment funds in the U.S. and illustrates that institutional money is way ahead of private client money in getting out of the way of market risk to the downside.

According to the New York Times December 8, 2015 "If It Owns a Well or a Mine, It’s Probably in Trouble".

“The world of commodities has been turned upside down,” said Daniel Yergin, the energy historian and vice chairman of IHS, a consultant firm. “Instead of tight supply and strong demand, we have tepid demand and oversupply and overcapacity for commodity production. It’s the end of an era that is not going to come back soon.”

Some energy experts are even beginning to express concerns that sovereign wealth funds of Saudi Arabia and other wealthy Persian Gulf and oil-producing countries will redeem their money from investment firms in the coming year to shore up their balance sheets. If they do, the moves could initiate more instability in global equity and debt markets.

The full article is worth reading for Canadians who are also heavily leveraged and require employment earnings to satisfy debt repayment on assets that have insufficient equity to refinance.

Credit lines drying up for oil companies?

Notice the comments about the competition between Sunni (Saudi Arabia) and Shia (Iran) oil.

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Distress (bonds trading over 1,000bps) has been spreading across the HY space. From its starting point in energy a year ago, it has now reached other commodity-sensitive areas such as transportation, materials, capital goods, and commercial services. But it did not stop here and is also visible in places like retail, gaming, media, consumer staples, and technology – all areas that were widely expected to be insulated from low oil prices, if not even benefitting form them.

In other words, what was until a year ago a purely "energy" phenomenon is now an "everything" phenomenon, despite promises by every prominent economist that plunging energy prices are great news for the economy.

Worried

11/17/2015

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Worry Worry Worry
The chart to the left shows the GDP growth rate in Canada, the U.S. and Japan since before the 2009 Pit of Gloom to 3Q 2015

I was prompted to compare the three after reading Michael Sankowski's "Crazy Talk: Raising rates while Inflation is near 70 year lows." and Beowulf's comment "...Congress should go ahead and pass a law locking in rates..." (Monetary Realism July 2015)

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Japan has been at it for decades using the "stimulus" of low bank rates but inflation is at historic lows and globally it looks like more DE-flation according to the Baltic Dry Index downtrend and a new low set today.

So will the U.S. Fed begin to raise rates at their next meeting, December 2015 with Canada following soon after? The Fed is not answering the question but is leaving room to wiggle: "The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run." (FOMC Oct 28, 2015)

Hello Japanada. I think what has to happen before rates rise is that inflation has to show up in wages alongside of higher employment rates and then we will see the general CPI overtaking the target mandate (2%-ish). Look again at the top chart comparing Canada, the U.S. and Japan... the 3 plots are similar rising and falling in concert and the question is, will the U.S. GDP start going negative. There is a good chance of it because the USD continues to strengthen against other currencies and the net trade deficit year to date increased 3.9% Y/Y as exports decreased 3.8% and imports decreased 2.4%. (US BEA, Nov 4, 2015).

Meanwhile in Canada average earnings are under pressure. (my Earnings & Employment page)... and credit creation is stalled.

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Why do the hot Canadian real estate markets continue to outperform? Certainly low rates are an inducement to buy since they lower the qualification bar on the credit worthy at the margins, but qualifying for credit does not mitigate risk when the real estate object of desire is a negative yielding asset. It's all good in a rising price environment, but if prices correct for any reason the spotlight will turn to earnings and cash flow.

The chart above are the Canadian 90+ days delinquency rates. Trouble spots continue to be auto loans and credit cards. The average auto loan climbed 2.87 per cent from a year ago to $19,649 while the average credit card debt was up 3.04 per cent to $3,745.

I did a back of the napkin ownership cost on a mid range vehicle ($49,000 plus taxes, fees and documentation of $6,500) financed with 10% down and only 2% financing over 3 years. That $49,000 car ends up costing close to $60,000 by the end of the third year and has depreciated by 50% to be worth only $30,000. If the car is sold in month 37, the cost that the consumer has paid is approximately $833 per month to drive a new car for 3 years without even adding in maintenance ($100/mo?), insurance ($100/mo?), parking ($100/mo?) repairs ($?) or disposal cost ($?) of the vehicle.

SEARCH MODO

I belong to Vancouver's best and biggest car sharing non-profit society MODO and my cost for having access to over 400 vehicles as well as using taxi's and public transport is less than $150/month for two people.

The Bank Job

3/18/2015

Canadian Retail Sales, Balance of Trade & the Current Account

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Are Canadians Spent?

Canadians are being lured once again with a new record low 5 year fixed mortgage rate at 2.79% (CBC News, March 17, 2015). The creditworthy are going to take advantage of the potential to leverage this new helicopter drop.

But according to the charts above, they suggest that the remaining productive Canadians have already spent their future earnings and are liquidating their savings.

The top panel shows Canadian Retail Sales with and without auto sales since the Pit of Gloom in March 2009. The lower panel shows the Canadian Balance of Trade as well as the Current Account in the same time frame as retail sales.

Notice in the top panel that retail sales ex-auto have plunged and are nearly at the March 2009 Pit of Gloom lows. It might be cheaper than last year to drive to the mall but when you get there, imported goods (including refined fuel) require more of those 78 cent dollars. If Canadians are not in the stores buying stuff, employers will reduce labour costs (fewer hours or more automation) and manufacturers will produce less for this market.

In the lower panel, the Canadian Balance of Trade is plunging into deeper negative readings than at the pit of gloom as the export trade gets swamped by higher import costs on a low CAD.

The Current Account overlay remains at pit of gloom lows and the only way to reverse the deficit trend is to increase exports, decrease imports, depreciate the CAD, increase domestic savings or reduce domestic and or national borrowing or a combination of the above.

Mortgage debt requires a long term transfer of savings to transform the liability into an asset. A $100,000 loan at 3% with monthly payments over 25 years requires a repayment of $142,263.39 and does not account for increases in interest rates over 25 years.

The additional $42,263.39 of interest payments is coming out of savings but not going into productive investment. A mortgage is not an investment or a savings plan.

If the collateral securing the mortgage depreciates faster than the loan principal outstanding, debt revulsion will trump consumption desire.

The Storys - Money (That's what I want)

Dollar War

2/25/2014

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The 2 Sided Loonie

The chart mashup shows the difference in labour unit cost between Canada and the U.S. in the top panel and the steady drop in the CAD relative to the USD since 2011 (middle panel) and the Canadian balance of trade in the bottom panel.

Only about 30% of Canada's GDP is derived from exporting and most Canadian exporters will enjoy the CAD falling against the USD because most of their export trade (75%) is to the U.S.

But the Loonie remained relatively high against the USD for 5 years (2002-05) and that led to purchasers of Canadian exports to look for alternative sources and that led to more layoffs in Canadian production plants (Bombardier cut 1700 jobs, Kellogg cut 500, Heinz cut 740, Blackberry cut 4500 - Bloomberg).

Layoffs are not easily reversed, and as the top panel of the mashup shows, the Canadian unit labour cost is 14-15% above the U.S. making it that much harder to sell into the U.S. or anywhere else (IMF via Reuters).

As a consumer society, disposable income is also shrinking in Canada as the price of everything we import goes up against the falling CAD and a falling safe haven status compounded by the end of the Canadian Immigrant Investor Program this month which only attracted 130,000 people since the 1986 inception (Globe & Mail).

The foreign investor class has good reasons to look at their Canadian asset portfolios and high on the list will be negative yielding real estate bought in the last 10 years. We could see some drama on the MAR-MOI charts this year if real estate inventory for sale surprises to the upside.

Canadian Consumer

2/10/2014

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Austerity? Not for the Canadian Consumer

Canadian Consumer Debt Zoomed 9% Y/Y in 2013 according to Equifax as reported by CBC News today in advance of Minister of Finance Mr Flaherty's Budget, scheduled to be tabled tomorrow. If the government budget again includes their mantra "We are going to Balance The Budget in 2015" (Oct 2015 is when the next federal election is), then a 9% annual growth in private sector consumer debt is going to increase even more unless lenders freak and turn off the tap, or consumers withdraw into balance sheet repair. Don't worry about non-conventional mortgages (mortgages of more than 80% Loan to Value); they are all insured mostly by you dear tax payer. Mortgage debt clocks in at almost two thirds of Canadian Consumer Debt and that increased 12% over the last year.

As can been seen by the charts below, Government Debt to GDP is curving down and that is not occurring because we are a successful export country. Nope... we are an import country as reflected in our Trade Balance which has been locked into a 5 year negative channel since the March 2009 Pit of Gloom. Government Spending Growth has been reduced (via Balance the Budget Policy) and the hit to the CA$ in the last year has driven up the cost of imports and most of the stuff we buy. In order to maintain its lifestyle, the Private Sector is using credit in the absence of Government Sector spending and a chronic Trade Balance deficit.

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Commodity Dependence Vulnerability

11/19/2013

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Eggs all in 2 Baskets

Government subsidizes the housing and banking industries by price fixing the cost of credit. Direct and indirect employment is disproportionately funneled into construction (see Labour Force Participation post).

The same story has been repeated globally and according to BMO chief economist Douglas Porter "Canada's rising dependence on commodities trade makes it vulnerable to price declines."

Canadians do not appear to be willing to add value to their resources by developing infrastructure and manufacturing capacity.

In the mashup above, the two top charts are from SoberLook.com and they observe:

With prices drifting steadily lower since the spring of 2011, it seems safe to conclude that commodities are not going to bail us out this time—the Super Cycle is over. While global growth will likely be just firm enough to put a floor under resource prices in 2014, Canada simply cannot rely on improving terms of trade to lift incomes further, or to turn around a weak trade performance. The dramatic rise in U.S. oil and gas production further complicates the picture by putting downward pressure on North American energy prices.

Here is what's driving this dependence on commodities exports.

Canada continues to struggle with lagging labor productivity. Anecdotal evidence suggests that businesses are avoiding opening labor-intensive operations in Canada due to high costs. As a result, manufacturing employment and output failed to grow over the past decade - and in fact have been declining. Without growth in manufacturing, Canada has been increasingly dependent on natural resources for growth... the non-energy component of Canada's trade has declined sharply over the past decade.

Construction Reliance

9/20/2013

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Housing Extreme Canada

According to a report from BMO Capital Markets, residential and non-residential construction accounts for 13.4% of Canadian GDP and is well beyond the 30 year average of 10.4%.

The U.S. reliance on construction is only 5.8% of GDP and at the top of their housing bubble in 2006 was only 9.4%.

The reliance on this volatile cyclical sector shows up in the employment data where 9.7% of Canadian workers are employed.

“Any time you get to extremes on almost any measure of the economy, you have to start asking serious questions,” said Doug Porter, chief economist at BMO Capital Markets “Has something fundamental changed to justify this, or is it an accident waiting to happen?”

A period of exceptionally low interest rates “juices” construction more than other sectors, Mr. Porter said. And interest rates can change in rapid and unpredictable ways.

BMO’s report says construction’s outsized share of the Canadian economy is an example of how Canada’s unbalanced monetary policy–low rates, high currency–is affecting the economy.

Read the whole Wall Street Journal September 19, 2013 article by Don Curren on a BMO Capital Markets report: "Construction Might Loom a Little Too Large in Canada’s Economy"