Justin Havre put together a survey comparison of Canadian and U.S. Millennial's opinions of when they think home ownership is possible. The takeaways are:
And as I have been tracking on my Household Debt chart, there appears to be a structural change in Canada that has led to:
And we still don't know about the net effects of Trump's Tariff-O-Nomics. So if you are going to leverage a home purchase with the maximum amount of debt allowed under the new stress test qualifiers, make sure you have your income contract term lengths matching up to your debt obligations.
Currency depreciation on top of foreign buyer taxes and real estate sales that are plunging against a backdrop of rising inventory is evaporating paper profits for would be Canadians. Locals whether they own or rent are not spared either. A dropping CAD is raising import costs while the Trumpster builds a wall of worry out of trade tariffs and that worry is especially provoking to the over leveraged in Canada.
Is King Dollar Creating A Bullish Head & Shoulders Pattern? by Chris Kimble June 28, 2018  CLICK CHART TO ENLARGE
The chart above adds more to the story. Since the dot com bust in 2000, net trade has plunged and to preserve lifestyle, household debt to income has soared to recent highs. Then with the credit collapse in 2008, import prices began to soar while the employment rate dropped against rising productivity and a savings rate that has plunged since the 1981 interest rate spike (Trading Economics Chart). Why bother saving when the government monetary policy is to leverage one's way to prosperity and let time and asset price inflation take care of balance sheets. It's a global trend and the fear of missing out has been a powerful input.
But peak debt may be upon us in this business cycle as banks begin to report a drop in mortgage demand. The Canadian Imperial Bank of Commerce anticipates it will issue half as many new mortgages in the latter part of the year as it did in the same period of 2017 amid cooling in the real estate market. Times Colonist May 23, 2018
The ranks of the credit worthy are thinning. Debt retirement is either a slow process of repayment, or a quick liquidation of assets. Your balance sheet is the clue to your future. Governments demand stress tests; individuals should as well.
David Rosenberg: Ottawa created the debt monster that Canada now faces.
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Libor’s spread over the overnight index swap rate, known as Libor-OIS, has widened... another sign that banks face steeper funding costs. Bloomberg March 12, 2018
As noted on the charts: "About $350 trillion of financial products and loans are linked to Libor, with a large chunk hinged to the dollar-based version of the benchmark." Bloomberg March 12, 2018, and...
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"...the widening nevertheless reflects an increasing scarcity of dollar funding..." Bloomberg March 20, 2018.
Scarcity of Dollar funding means we should prepare for a rise in the $USD:$CAD pair. In terms of Canadian real estate I chart it in USD here. A strengthening USD means higher import costs for Canadian consumers at a time when interest rates are trending up.
Our Canadian national proclivity to fund our lifestyles via debt rather than income continues to produce a negative Net Trade and FDI, a flattening GDP and growing record household debt levels, charted here.
Scarcity of Dollar funding means we should prepare for a rise in the $USD:$CAD pair. In terms of Canadian real estate I chart it in USD here. A strengthening USD means higher import costs for Canadian consumers at a time when interest rates are trending up.
Our Canadian national proclivity to fund our lifestyles via debt rather than income continues to produce a negative Net Trade and FDI, a flattening GDP and growing record household debt levels, charted here.
Why Consumer Debt is Canada's Greatest Economic Risk
"Consumption to Top Off" Bloomberg March 15, 2018
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In December 2017, the 10yr less 2yr Canada Government bond spread narrowed to just 32 beeps away from inversion. |
In April 2006 it was 33bps away and narrowing until it was fully inverted in May, June and July of 2007, and then central banks panicked and goosed the spread to widening again and by November 2007 it was 31bps again.
A year and half later the wide reached 230 beeps in May 2009, 2 months after the pit of gloom crash bottom.
We should start watching for further narrowing now especially with equity markets at their historical tops.
A year and half later the wide reached 230 beeps in May 2009, 2 months after the pit of gloom crash bottom.
We should start watching for further narrowing now especially with equity markets at their historical tops.
The Macro Model" chart below is from Crescat Capital with a few of my notations about Canadian debt levels which are at historical highs. NILS JENSON from Crescat Capital on January 27, 2018 made the observation that:
Market history is littered with downturns that followed new Republican presidents: Hoover (1929), Eisenhower (1953), Nixon (1969), Reagan (1981), and Bush (2001). The Trump bubble will likely prove to be the mother of all Republican presidential ebullience bubbles. Trade wars are not positive at all for the markets. They are what exacerbated the Great Depression and they should be one of the key triggers of the bursting of the China bubble.
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Here's Who Could Lose the Most in a U.S.-China Trade War
Bloomberg, January 23, 2017
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Pictured here is Finland's first high-rise wooden apartment.
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Cross-Laminated Timber |
Hey Canada - we have lot's of trees and lots of land!
In this Finnish model, tenants have the right after a 20 year amortization to own their unit with a 7% down payment and a twenty year state backed loan.
Canadian housing should be affordable and this is an idea that we hewers of wood can do. The University of BC has one up now.
In 2010, Canada was the second-largest exporter of forestry products globally. WikiPedia
Instead of exporting to the highest bidder, why not add value and produce our own housing remedies?
Only Canadians will solve our housing mess. So lets get on with it.
Snippet from "What the U.S. wants from NAFTA talks"
Globe & Mail July 17, 2017
As part of changes to trade laws, the U.S. proposes to eliminate the NAFTA global safeguard exclusion as well as the Chapter 19 dispute settlement mechanism. These panels have regularly ruled in Canada's favour, including on the long-running softwood lumber dispute, and have been long disliked by some Americans who see them as an abdication of U.S. sovereignty.
Snippet from "Freeland calls U.S. NAFTA demands 'troubling' and 'unconventional'" CBC News October 17, 2017
"You have to ask yourself whether the Americans are preparing the ground for an abrogation that will be triggered by someone other than them," "So they can blame someone for the collapse other than themselves, even though it's their outlandish proposals that may trigger the demise of the negotiation." Derek Burney, Canada's ambassador to the United States from 1989-93
Snippet from "What is Donald Trump's NAFTA plan? Canadian experts take their best guess" National Post Oct 16, 2017
“The White House says that it is focused on using trade policy to reduce bilateral trade deficits, but this goal is impossible to achieve through even radical rewrites of existing trade agreements,” House said. “The U.S. will continue running a trade deficit with the world so long as its people consume more than they save.” Brett House, Deputy Chief Economist at Scotiabank
The last quote above “The U.S. will continue running a trade deficit with the world so long as its people consume more than they save.” applies to Canadians as well who are prized by the rest of the world as consumers with lots of available credit. See household debt chart.
The Lumberjack Song - Monty Python's Flying Circus
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While we wait for the Clinton Trump toss up at Hofstra U. tonight, let's look at some data that affects everyone on the continent, ie: manufacturing wages measured in USD since the gloom of 2009 in Canada, the U.S. and Mexico. I have been showing for some time now, that Canada's net Federal Direct Investment balance has been negative for nearly 20 years and last year it widened significantly.
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Clearly, capital likes to go where the return on investment is high especially in productive sectors like manufacturing where competition for buyers is cutthroat.
The chart above shows that Canadian manufacturing wages have jumped 21% in the last 7 years while in the U.S. they have gone up only 12% and in Mexico they have DROPPED 7% to US$2.10 per hour. (no typo - that's US$2.10/hr)
Canadian households have become highly indebted (168% debt to income) via government insured credit and animal spirit peer pressure. The IMF has been sounding the alarm bell at least since 2011 "Households, however, already have done enough borrowing, at least when it comes to real estate. Any further buildup of debt only risks a painful collapse." That's what they said 5 years ago.
The chart above shows that Canadian manufacturing wages have jumped 21% in the last 7 years while in the U.S. they have gone up only 12% and in Mexico they have DROPPED 7% to US$2.10 per hour. (no typo - that's US$2.10/hr)
Canadian households have become highly indebted (168% debt to income) via government insured credit and animal spirit peer pressure. The IMF has been sounding the alarm bell at least since 2011 "Households, however, already have done enough borrowing, at least when it comes to real estate. Any further buildup of debt only risks a painful collapse." That's what they said 5 years ago.
Canadians are just $200 away from being overwhelmed by debt, new survey finds Financial Post September 28, 2016
> Calgary-based MNP LLP, said 56 per cent of those polled — up from 48 per cent surveyed six months ago — are close to facing negative cash flow should they take on up to another $200 in monthly debt.
>The online survey of of 1,502 Canadians conducted between Sept. 6 and Sept. 12 also found 31 per cent are already not paying their bills on time, making them technically insolvent, MNP says.
> A survey this month from TransUnion found 718,000 Canadians can’t even absorb a 25-basis point increase in interest rates without being in a negative cash flow situation. One percentage point would drive 917,000 over the edge, the credit rating agency found.
> In another recent study, the Canadian Payroll Association said 48 per cent of Canadians couldn’t make ends meets if they missed just one paycheque – a dire picture of a country living paycheque-to-paycheque.
> MNP said there is some positive news about debt costs. More Canadians now say they are concerned about their debt: 52 per cent, up from 43 per cent six months ago.
And here we are now trading real estate to each other at prices far greater than most places on the planet and that has attracted global capital into Canada to buy our hovels (speculative consumption). It's kept the F.I.R.E. service sector fully employed but has done very little for long term productive investment because long term bond yields cannot compete with flipping real estate. In the last 43 months, Vancouver single family detached house prices have gone up 1.7% per month or 20.4% per annum for nearly four years!
The latest sales/inventory ratio suggests that the risk of sentiment change is occurring in Vancouver (not yet in Toronto); but our very high labour cost relative to our U.S. and Mexican trade channels is going to put pressure on the Bank of Canada and the Federal Government to let the CAD/USD continue dropping (Bloomberg May 2016) "Currency depreciations would help many of the U.S.'s G7 partners (Canada, France, Germany, Italy, Japan, UK, & EU) a lot while hurting the U.S. little, if at all. In other words, a G7 currency war would be fine as long as the U.S. remained a pacifist."
A lower CAD/USD will help Canadian exporters to some degree but not enough to compete directly with Mexico and other low labour cost and low-bar regulatory regimes (China, Vietnam, Indonesia etal). A lower CAD/USD will also put more inflationary pressure on import costs into Canada reducing disposable consumer income that will affect consumption of domestic services including the demand for credit while debt repayment schedules may have to have their amortization terms lengthened especially if earnings growth slows.
The latest sales/inventory ratio suggests that the risk of sentiment change is occurring in Vancouver (not yet in Toronto); but our very high labour cost relative to our U.S. and Mexican trade channels is going to put pressure on the Bank of Canada and the Federal Government to let the CAD/USD continue dropping (Bloomberg May 2016) "Currency depreciations would help many of the U.S.'s G7 partners (Canada, France, Germany, Italy, Japan, UK, & EU) a lot while hurting the U.S. little, if at all. In other words, a G7 currency war would be fine as long as the U.S. remained a pacifist."
A lower CAD/USD will help Canadian exporters to some degree but not enough to compete directly with Mexico and other low labour cost and low-bar regulatory regimes (China, Vietnam, Indonesia etal). A lower CAD/USD will also put more inflationary pressure on import costs into Canada reducing disposable consumer income that will affect consumption of domestic services including the demand for credit while debt repayment schedules may have to have their amortization terms lengthened especially if earnings growth slows.
ITEM: BlackBerry Abandons Its Phone New York Times September 28, 2016 - In recent years, BlackBerry has cut thousands of jobs and closed several operating centers, including one in this city (Halifax), over the last three years. A company spokeswoman declined to discuss any future layoffs.
A lower CAD/USD will not be favourable to the foreign buyers of Canadian real estate who purchased in the last 7 years if their own currencies do not drop as much as the CAD. Will they continue to hold a wasting asset that produces a negative cash flow?
The hysterical mania of buying real estate in Canada will come to an end when we see listing inventories rise, perhaps in 1Q 2017 if a shift from greed to fear manifests.
And from CNBC, September 27, 2016:
"Vancouver in Canada has been identified by Swiss bank UBS as the global financial center with the riskiest housing bubble."
"Currently, house prices in Vancouver seem clearly out of step with economic fundamentals, and are in bubble risk territory."
In the meantime, "The OECD warns that a low-growth trap has taken root, as poor growth expectations further depress trade investment, productivity and wages." Sept 21, 2016
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Did we import a Boom?
As the mashup of charts of Canada & U.S. Savings Rate, Retail Sales and Household Ownership demonstrates, Canadians have gone all in on the consumption industry errr... I mean the construction industry. Well that's what housing construction is. Yes it does produce a finished product but essentially it is an assembly of imported commodities that we put together just like in our automotive "industry"(ironically, oil is near the top of the import list). |
We are not assembling productive capacity; it's a one-off affair selling depreciating assets financed with debt that depreciates much slower than the object of our desire. As the Household Debt and mortgage chart illustrates, we are approaching, if we have not already, peak household debt and as the mashup of charts above show, we are burning through our savings with so little disposable income left that the retail sector is showing signs of a potential contraction. The late stage rally to "own" real estate in Canada looks like it may also be facing a momentum challenge that occurred in the U.S. a decade ago.
"COUNTRY PRICING"
The Cost of Being Canadian
even when the CAD/USD is near par
CBC Marketplace
 CLICK CHART TO ENLARGE | 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 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)
 CLICK CHART TO ENLARGE | Dollar Depreciation Canada Edition Stats Can Headlines via Trading Economics: > Canada Trade Gap increased in December of 2014 > Canada Trade Deficit Widens in November 2014 > Canada Trade Surplus Narrows in October 2014 |
4 of the last 6 months of Canadian
trade balances have been negative
trade balances have been negative
Big media has been spinning the low CAD as a net positive for Canada. But it's not working out and probably explains in part the sudden decision by the Bank of Canada in cutting its key lending rate another 25 beeps on January 21, 2015, depressing the CAD/USD even further, but:
"There is considerable uncertainty about the speed with which this sequence (increased foreign demand, stronger exports, improved business confidence, investment and employment growth) will evolve and how it will be affected by the drop in oil prices. Canada’s weaker terms of trade will have an adverse impact on incomes and wealth, reducing domestic demand growth." (Bank of Canada)
Export countries want their currency to be valued less than their customer's currency so that they can 1) undersell the competition and 2) try to increase inflation (which increases tax collections). Neither is working. While exports rose 1.5% in December 2014, imports rose 2.3 percent with gains in 8 out of 11 import sectors. The main contributors to the increase in imports were energy products, motor vehicles and parts, as well as metal and non-metallic mineral products. Although Canada is a net energy exporter, its economy measured by GDP is that of producing 30% goods and 70% services (Stas Can Nov 2014).
"There is considerable uncertainty about the speed with which this sequence (increased foreign demand, stronger exports, improved business confidence, investment and employment growth) will evolve and how it will be affected by the drop in oil prices. Canada’s weaker terms of trade will have an adverse impact on incomes and wealth, reducing domestic demand growth." (Bank of Canada)
Export countries want their currency to be valued less than their customer's currency so that they can 1) undersell the competition and 2) try to increase inflation (which increases tax collections). Neither is working. While exports rose 1.5% in December 2014, imports rose 2.3 percent with gains in 8 out of 11 import sectors. The main contributors to the increase in imports were energy products, motor vehicles and parts, as well as metal and non-metallic mineral products. Although Canada is a net energy exporter, its economy measured by GDP is that of producing 30% goods and 70% services (Stas Can Nov 2014).
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Global oil demand growth remained at a relatively suppressed 585 kb/d y-o-y in 4Q14. There are several reasons why lower crude oil prices so far seem to have failed to stimulate demand. Those include heightened deflationary risks in both Europe and Japan; adverse revenue impacts on net-oil-exporters; a global trend towards reductions in energy price subsidies and/or increases in oil consumption taxes; and the heavy falls experienced by many currencies, versus the US dollar, negating the impact of lower crude prices in domestic currency terms. Reflecting the downwardly revised macroeconomic backdrop, mid-January saw the World Bank revise down its 2015 global economic growth forecasts to 3.0%, versus 3.4% in June 2014, still an acceleration on 2014 (+2.6%) but notably less-so than previously assumed. (International Energy Agency)
New Record Lows on the Baltic Dry Index Chart
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"When inflation expectations are solidly anchored, as is now the case in Canada, there is no reason to fear deflation." said senior Bank of Canada deputy governor Agathe Côté, and yet many analysts are expecting the Bank of Canada to lower its central bank rate again at its next scheduled rate announcement on March 4, 2015. (Canadian Press via CBC News Feb 19, 2015)
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