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.
Commodity Super Cycle - 10 Years into the Bear
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.
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
House Price to Rent Ratio ... Canada Ranks 2nd
House Price to Income Ratio ... Canada Ranks 2nd
Real House Prices ... Canada Ranks 3rd
Household Debt to GDP ... Canada Ranks 5th
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:
#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
These trends have taken 10, 20, 30 and 40 years for the credit cycle to fully manifest and now the effects of unproductive capital have emerged with a nascent transition to the early stage of a new credit cycle where companies and households will try to deleverage by reducing the amount of debt they hold while risk appetite is low and the cost of risk taking is high.
...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
One of the problems facing our "economy" is the rampant flow of hard to track global criminal capital moving into jurisdictions attractive to money laundering... in this case Canada. The World Bank and the International Monetary Fund produces corruption ratings and by their measure British Columbia ranked fourth for money laundering among six regions in Canada. Manitoba and Saskatchewan combined were said to have more money laundering activity than B.C.
"B.C. Attorney General David Eby announced Justice Austin Cullen has agreed to lead what will be known as the Commission of Inquiry into Money Laundering in British Columbia, which is expected to produce a report in May 2021." Powell River Peak, May 2019
Meanwhile the "Vancouver Model" continues to move east across Canada (see my NOV 2018 post DIRTY REAL ESTATE); "The C.D. Howe Institute study estimates of money laundering in Canada range from $5 billion to $100 billion. SEP 2018"
That money after it's cleaned flows into business elements and hard assets throughout the "economy". It's going to take a new generation of activists to replace the mob model we find ourselves in.
One thing that generation could do is to replace our taxation system with an iteration of the APT tax which is an automated micro tax on any financial transaction. The authors of the APT tax model demonstrate the "desirability and feasibility of replacing the present system of personal and corporate income, sales, excise, capital gains, import and export duties, gift and estate taxes with a single comprehensive revenue neutral Automated Payment Transaction (APT) tax... In its simplest form, the APT tax consists of a flat tax levied on all transactions. The tax is automatically assessed and collected when transactions are settled through the electronic technology of the banking/ payments system... Real time tax collection at source of payment applies to all types of transactions, thereby reducing administration and compliance costs as well as opportunities for tax evasion."
Additionally, the APT can be adjusted easily so that it is revenue neutral, ie: we could as a society set our fiscal priorities to accomplish our social contract goals with a tax burden of less than 2% of ALL financial transactions throughout a computerized banking and financial system. We would not have to debate where the money comes from... there is more than enough of that... but we would only be left with a debate of how to invest the money. See my complete APT post of NOV 2012
Let the new digital generation take this challenge on.
Meanwhile David Rosenberg May 2019
The investor class is heading towards liquidity
in the form of U.S. Treasuries and the USD
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
The chart above shows the number of homeless people living in Vancouver based on homeless counts conducted between 2005 and 2019. City of Vancouver Data via Global News
The homelessness data in Canada according to Nathalie Rech, (thecanadianencyclopedia.ca) April 29, 2019 are...
"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.
The chart below is from George Marshall, a research analyst with Statistics Canada’s Insights on Canadian Society published June 26, 2019. Their conclusion follows the chart.
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.
As Cities Grow, So Do the Numbers of Homeless
If your capital is tied up in assets that are dropping in value, your lifestyle will come under the scrutiny of your bookkeeper, accountant and banker. And this reappraisal, if your net worth is shrinking, will lead to decisions focused on turning debt into equity. Sell the asset or accelerate the payments on debt principal; either way, your lifestyle will change. If for any reason your cash flow is trending towards negativity, the need to sell assets quickly becomes the first choice. As we know, Canadians are all in on the debt side of their balance sheets with household obligations at record debt to asset levels.
- ITEM JUN 2019 Bloomberg: Delinquency rates rise in Canada as consumers add more debt: Equifax
- ITEM MAY 2019 CBC News: High household debt, possible housing market shocks are main risks to the economy: Bank of Canada
- ITEM APR 2019 Better Dwelling: Canadian Household Debt Is Growing Much Faster Than Asset Values
- ITEM MAR 2019 The Insurance Journal: Many Canadians say they will liquidate assets to pay down debt in 2019
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)
‘Maxed out’: 48% of Canadians on brink of insolvency, survey says.
That's what the recent survey via BNNbloomberg.ca conducted by Ipsos for insolvency firm MNP Ltd. says.
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.
The poll is conducted quarterly for MNP and surveyed 2,070 Canadians online from March 13-24... phew.
Fortunately for the rest of us, this is a small sample relative to our more than 35 million residents... but according to sciencebuddies.org a survey of 2000 random people will produce a margin of error of only 2.2%. Oh oh.
If this poll is a reflection of Canadian's ability to continue borrowing to fund lifestyle as they have for the past decade of accelerated leverage, then next up will be a slowdown in consumption which is Canada's major GDP input. The April 2019 IMF table of Global Economy projections is below; Canada's economy is indeed facing a challenge.
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.
...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
High household debt levels reduce consumption abilities which puts downward pressure on employment which is already facing the digital transformation of supplying goods and services. Lender and borrower risk leads to debt revulsion by both sides of the equation.
Credit booms are followed by credit busts and as the chart shows, Canadian Residential Mortgage Credit (%Y/Y lending) has been shrinking dramatically since the July 2008 Crude Oil Peak and the Crash into the March 2009 Pit of Gloom (6 Metros Chart).
It's been 10 years since the 2008-09 crash which is difficult to even remember now after 10 years of watching our housing prices more than double. But as Hilliard Macbeth points out in the chart above, when residential mortgage lending momentum approaches and dips into a negative metric, housing prices tumble and recession metrics begin to appear. In the two biggest FOMO markets, Vancouver and Toronto, prices indeed have been dropping in the 7-9% per year range after peaking 18-20 months ago respectively (Plunge-O-Meter).
As Hilliard further points out:
"There hasn’t been a serious economic downturn in Canada since the 1990s; the last time that mortgage credit grew as slowly as now. Unfortunately bank lending is pro-cyclical, so lenders will tighten credit conditions just as real estate borrowing stops growing, which will make the downturn worse. This boom/bust cycle is inevitable as long as lenders focus on lending for real estate investment and speculation rather than more productive investments. To change that focus, a new set of rules and regulations that govern lending is needed.” Quote included in Jason Kirby and MACLEAN's Most Important Charts to Watch in 2019
Canadian Banks on "Credit Doomsday Watch" CIBC
The CIBC analysts said that Canadian banks appear to be headed for their weakest credit cycle since the oil price collapse, which caused related loan losses to jump in 2016. While their prediction is “not a coming apocalypse,” the report said the banks’ loan losses last quarter had a “one-off feel to them” that could become more frequent. “For reference, the actual doomsday clock sits at two minutes to midnight,” the analysts said.
Well it could easily be one o'clock in the morning as weak hands cut their losses. Hat Tip to @Hutchyman
It's important to remember that our housing and credit boom is part of the global credit boom and it's fading. Hat Tip to @TaviCosta
Gabriela Ramos, OECD Chief of Staff and Sherpa overseeing the Organisation’s work on Inclusive Growth, presented in more details the main findings of the report, saying “our analysis delivers a bleak picture and a call for action. The middle class is at the core of a cohesive, thriving society. We need to address their concerns regarding living costs, fairness and uncertainty.”
The cost of a middle class lifestyle has increased faster than inflation. Housing, for example, makes up the largest single spending item for middle-income households, at around one third of disposable income, up from a quarter in the 1990s. House prices have been growing three times faster than household median income over the last two decades.
More than one in five middle-income households spend more than they earn and over-indebtedness is higher for them than for both low-income and high-income households. In addition, labour market prospects have become increasingly uncertain: one in six middle-income workers are in jobs that are at high risk of automation, compared to one in five low-income and one in ten high-income workers.
Read the Full Report "Governments must act to help struggling middle class"
On march 11th 2019, David Larock an independent full-time mortgage broker laid out his "Case for Lower Canadian Mortgage Rates", below edited, but read the whole feature report at MoveSmartly.com
The Bank of Canada acknowledged that our current economic slowdown is now “more pronounced and widespread” than it had previously forecast.
Global economic momentum is slowing.
Our economic slowdown has been sharper than expected.
Housing and consumption have slowed, and business investment and exports haven’t picked up the slack as the BoC had hoped.
Inflation expectations have been lowered.
Uncertainty is increasing.
Our output gap is widening because debt is choking off growth, and that is a powerful, long-term headwind, which will continue to exert itself long after global trade networks have been re-established.
On this last item, my Household Debt chart is in agreement.
Tuomas Malinen @mtmalinen for the charts above.
Today, March 13th 2019, the live
Canadian Productivity Chart exhibits a slowdown.
While we wait for the February real estate data to come in, here is the latest UBS update to their real estate bubble index.
Not many surprises; we have been seeing these cities appear on the most expensive lists for sometime now.
My Demographia file has been tracking these cities since 2005.
Vancouver, whose house prices accelerated to a double-digit rate relative to last year, has a ballooning index score. Higher stamp duties for foreign investors proved futile in braking its boom. By contrast, Toronto’s price dynamics have slowed considerably and its index score declined somewhat from last year’s. In both cities, valuations have trended upward since the late 1990s. Neither the financial crisis nor weakening commodity prices has dragged them down. But rising rates, stricter market regulations or an economic downturn could turn the lights out on the party given the high valuations and strained affordability.
2018 UBS Global Real Estate Bubble Index PDF
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
Balance Of Trade
Rent Or Buy