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
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
As the U.S. Energy Information Admin EIA.gov noted in their December 12, 2018 report:
"...concerns about the pace of global economic growth in coming months have led to related concerns about the pace of oil demand growth."
The economic slowdown in China is on, being driven by "risky lending and a rapid rise in debt levels". That sounds familiar to me and I have plotted it out on my Canadian Household Debt, GDP, Balance of Trade and FDI chart.
After decades of sharp expansion, the Chinese economy is slowing down. Growth in 2018 is set to be the weakest since 1990. And 2019 looks even worse. The world's second largest economy is feeling the effects of a darkening trade outlook and government attempts to rein in risky lending after a rapid rise in debt levels. "The drivers of China's slowdown have yet to have their full impact on the economy, and the combination of both is unprecedented," analysts at Moody's wrote in a research note this month. "This creates a high degree of uncertainty and risk. CNN Business December 30. 2018
The USD which is the "senior currency" continues to go up in value when measured against other currencies. That is having a profound effect on global foreign debt holders that have to raise US dollars to repay their loans with their "depreciating" local currencies.
A further, significant strengthening in the dollar will tell us when the Deflationary endgame for the global economy is gathering force. It will crush debtors, bankrupt creditors and lop at least four or five zeroes worth of funny money from the banking system’s quadrillion-dollar shell-game. I have written extensively on why hyperinflation is extremely unlikely to settle debts that have become vastly too large to repay. If you cannot understand why, let me pose this question: Do you actually believe the banksters will let you pay off your mortgage with a few hundred-thousand-dollar bills that you’ve peeled from your wallet? If you answered in the negative, you are implicitly a deflationist.
The C.D. Howe Institute study estimates of money laundering in Canada range from $5 billion to $100 billion. C.D. Howe Report, September 2018
A return to savings will eventually allow the pendulum of capital investment to return to productive use. But asset deflation is in view now and we don't yet know it's future length of trend.
One asset class that retains value and even grows during a broad deflationary event is precious metals; and that canary in the coal mine is happening now. See my ongoing chart study of "real" gold and real estate.
December 31, 2018 note to clients:
"New lending activity and refinancing have contracted significantly since the beginning of 2018, a culmination of regulatory pressure, enhanced scrutiny following the banking royal commission, and the self-fulfilling consequence of slowing house prices driving an investor pullback... A rising cost of credit represents a blunter instrument for slowing lending, since it impacts both owner-occupiers and investors in parallel,"JP Morgan's Henry St John
that's not a quote about Canada;
but these are:
Canadian real estate sales are feeling the pinch of higher interest rates, and consumer credit isn’t far behind. Bank of Canada (BoC) numbers show household debt printed a new record high. Despite the record high, the rate of growth continues to slow for consumer debt levels. The decelerating growth is yet another indicator that the credit cycle has peaked. Better Dwelling, July 2018
Market Rate Outlook: One more hike this year plus two more hikes next year. The market is not fully pricing in the next BoC rate increase until December... Canadians are now more sensitive to higher rates than ever before. That means consumption is slowing faster with every 1/4% BoC rate increase. RateSpy.com Sept 2018
Canada's economy is set to slow down even with a NAFTA deal, economists say:
"Our research finds that even with a NAFTA deal in place, the long-desired rotation in growth towards exports and business investment will be sluggish and won't offset the coming slowdown in household spending and housing activity," Royce Mendes, senior economist at CIBC Capital Markets
Sal Guatieri, senior economist at BMO Capital Markets, is also expecting growth next year to slow to 1.8 per cent, as reduced consumer spending and housing activity will weigh on growth.
RBC senior economist Nathan Janzen said the bank doesn't publish forecasts for 2020, but agrees that growth is shifting lower.
"We do expect a more modest pace of consumer spending going forward, and while housing activity should remain a contributor to growth, this sector as well should see more modest growth relative to the past," said Brian DePratto, senior economist at TD Bank.
Quote Sources: CBC News Sept, 2018
And as my long term chart study of Canadian Debt, GDP, Foreign Direct Investment and Balance of Trade shows, since the credit crash of 2009, Canadian's awesome consumption via debt has not led to higher wage employment production in Canada but to lower wage warehousing and transportation of goods and services that we import to maintain our lifestyles.
"The one-million square foot Toronto centre will be Amazon’s sixth facility in Ontario and ninth in Canada." Financial Post, July 2018
"Stabilization should not be interpreted as the start of another strong rally," they warned (TD Bank economists Derek Burleton and Rishi Sondhi). That's because mortgage rates are on the rise, and home affordability levels have reached their worst levels in a quarter century... in fact historical data shows that over the past half century, inflation-adjusted house prices in Toronto fell for about a third of the time. huffingtonpost.ca, Sept 2018
While China’s characteristics are unique, there is a distinct pattern of policy activism that can be seen globally that has been of limited effectiveness in curbing house price appreciation. The housing
Apparently it's still global and a lot of us are in the deep end of the debt pool now. Makeway for China as the water level rises.
By contrast, between 2009 and 2015, households had added an average of just three percentage points to their debt-to-GDP ratio each year, and that includes a large jump of 5.5 percentage points in 2009 as banks ramped up lending in response to the global financial crisis. Before 2009, household debt levels had hovered around 18 percent of GDP for five years. In other words, the debt burden for Chinese consumers has nearly tripled in the past decade.
Part of that rapid debt expansion has been deliberate. China’s government has encouraged increased borrowing and spending on items like cars and houses, to boost both consumption and investment. At the G-20 summit in February 2016, China’s sober central bank chief Zhou Xiaochuan remarked that rising household leverage had “a certain logic to it.”
At the same time, a generational shift is unfolding. Younger, urban Chinese are proving more willing to bring their consumption forward to today rather than pushing it off to the future as their parents did.
Most worryingly, though, skyrocketing home prices seem to be driving much of the increase in household debt. Andrew Polk, Bloomberg, February 2018
China's economy is headed for a difficult decade.
Michael Pettis, March 2018
As we wait for the first week of April to unfold and the March real estate data to come in, questions about the stock market's melt-up comes via @anilvohra69
Anil, a retired UBS rates options trader, quotes investment strategist Jeremy Grantham:
Bubbles have a blowoff phase lasting 21 months. Using a 5% threshold, the run from Feb 16 to Dec 17 was 22 months.
Hence the question "Have we seen the melt-up?" It certainly appears that way for Toronto Real Estate (as of February 2018 data) and the March data may add even more weight to the thesis.
If you are thinking of 'buying the dip' make sure your income is amortized over the length of your mortgage. In a melt down, the erosion of net worth will shift a lender's risk management exercise to more closely examine the strength and security of your net income.
As we know employment income growth is facing profound challenges.
Global Risks 2018
According to the IMF, over the past three decades 53% of countries have seen an increase in income inequality, with this trend particularly pronounced in advanced economies. Furthermore, today’s economic strains are likely to sow the seeds for longer-term problems. High levels of personal debt, coupled with inadequate savings and pension provisions, are one reason to expect that frustrations may deepen in the years ahead. We highlight four concerns: (1) persistent inequality and unfairness, (2) domestic and international political tensions, (3) environmental dangers and (4) cyber vulnerabilities. We conclude by reflecting on the increased dangers of systemic breakdown. World Economic Forum
Strongest 'Bubble Burst'' Alarm Just Went Off
Jeremy Grantham 2018
The CoreLogic Home Price Index Forecast suggests U.S. home prices will rise less than 5 percent this year, but if some 2018 mortgage rate forecasts pan out the mortgage payments homebuyers face could increase closer to 15 percent.
Andrew LePage, CoreLogic, February 15, 2018
But as I noted in my previous post; in December 2017 the Canada 10yr less 2yr metric, which is a measure of a recession threat, narrowed to only 32bps away from negative inversion where the 2 year yield would be greater than the 10 year.
But the new U.S. Fed chairman Jerome Powell pitched their congress yesterday with:
"recent data has strengthened his confidence on inflation." and
"yield curve has been a problem in past when Fed got behind and had to raise rates quickly; that's not the case now"
The Fed's is planning on three rate hikes in 2018, but after the announcement yesterday futures traders reacted and began pricing in a 1/3 possibility of a fourth rate hike! Zoom zoom.
Meanwhile the Bank of Canada is not so sure about it's course this year:
Bank Of Canada To Take Cautious Path With Two More Hikes In 2018: Reuters Poll
The central bank has raised interest rates three times since last July, amid a robust job market and solid economic growth, but policymakers have said repeatedly they will be cautious in considering further hikes. Leah Schnurr, Reuters February 27, 2018
More than 70% of non-cash, first-time home buyers — and 54% of all buyers — made down payments of less than 20% over at least the past five years, according to the National Association of Realtors.
According to Better Dwelling, February 2017, "1 In 5 Canadian Homeowners Commits Mortgage Fraud, Says Top Broker" and the three most frequent frauds are falsifying owner occupancy, hiring a shady mortgage broker to forge documents, and personal financial engineering (eg: hiding debt).
So 20% of Canadian mortgage applicants are willing to overstate their equity and or cash flow positions on a bet that a market that has been a fabulous thrill since the crash of 2008-09 will continue unimpeded.
Risk managers and margin clerks are no longer buying the story. When market prices drop, everyone's attention shifts to shrinking equity and rising loan to value levels.
The Toronto Housing market has already telegraphed the end of the 10 year trend of single family detached prices gaining 20% per year. Prices are now down over 17% in the last four months from the March 2017 peak. The 2007-08 correction was only a 13% drop in 13 months (Plunge-O-Meter).
And Vancouver buyers are still in lala land.
Hilliard Macbeth digs into the Toronto numbers beginning at 8.05 minutes below:
The U.S. is Canada's biggest trading partner (74% of our total exports and 65% of total imports StatsCan March 2017 data); so we pay attention to our southern neighbour; bigly.
The chart above is my look at Canadian household debt and the observation that Federal Direct Investment into Canada has now been net negative for 20 years with the just published 2016 data update. That's a trend and notice it's now at an historic wide for the last two years.
Foreigners have not been willing to invest in Canada in a net positive way for the last 20 years and Canadian investors prefer to seek their fortune offshore where labour costs are cheaper and regulations less onerous. "Canada’s fall to the third most attractive region in the world for investment is reflective of Alberta’s continued deterioration, as investors continue to view the province as less attractive for investment." Fraser Institute March 2, 2017
Canadians have made a massive long term leveraged bet on domestic housing which is a negative yielding asset that needs cash flow to sustain it. If you have recently signed up for a 25 year mortgage, you should consider asking your employer for a 25 year employment contract; you may need it if most of our business is with the U.S. All bets are off on the future.
I covered what I think to be President Donald Trump's characteristics on November 14, 2016, namely that his tendency is psychopathic and fascist: "Trumped" November 14, 2016, but Let me add some more descriptors.
Kleptocratic from the Greek, literally means "rule by thieves" (Wikipedia).
- ITEM: Trump Kleptocracy Watch: An Update. The New Yorker April 4, 2017
- ITEM: Kleptocrats manage to nationalize risk while privatizing profits. Washington Post January 5. 2017
- ITEM: Trump will turn America into an 'all-out kleptocracy' like Russia and Ukraine. Paul Krugman November 15, 2016
Sociopathic Narcissist: Donald Trump, Narcissistic Personality Disorder and Sociopathy, by John C. Espy Karnacology, March 01, 2017
Here is the introduction:
With all of the discussions going on about Donald Trump’s ‘narcissism’, I thought I might offer a broader clinical perspective regarding sociopathic narcissism. Clearly there is great ongoing discussion about Donald Trump’s ‘narcissism’, however, I believe what has been errant in the discussion is that Trump is by definition not just ‘narcissistic.’ Trump’s narcissistic manifestations also appear to be well entrenched in sociopathy.
From a pragmatic standpoint an ‘amount’ of narcissism is necessary for being successful as it is for living. What is imperative to understand, is that our now president appears to have a definable mental illness that appears to manifest as a narcissistic personality disorder with sociopathy.
This primitive form of narcissism is by definition an intractable and realistically untreatable mental illness that even under the most ideal of clinical circumstances is only manageable at best. In Mr. Trump’s case it is manifest in apparently shady business dealings and in politically oppressive ways. However, the etiology is not business per se or political by nature but rather psychological. What we see manifest in individuals who are primitively bound within this commingled pathological structure takes on the following dynamics:
Sociopathic narcissism is not a diagnosis that is mysterious or one that looks like magical realism. Rather, like most clinical processes it has a relatively well defined structure (within having almost a complete lack of intrapsychic structure) and is also relatively predictable, once the individual has revealed enough of how their sociopathic narcissistic dynamics manifest. First, as we have seen demonstrated repeatedly, and using Mr. Trump as an example, narcissists seek out others who will behave in an obsequious manner, not just while in their physical presence but also who will parrot their projections while out of their physical presence.
In clinical circles that possess a familiarity of sociopathic narcissistic personalities, there is a slang that refers to those who encircle a sociopathic narcissist, particularly one with power, as ‘pandering whores.’ The term is clearly derogatory, particularly for those who seek to achieve secondary gain from riding the coattails of a sociopathic narcissistic individual or those who also manifest the same psychological structure, but have not been able to, if you will, get the traction to achieve the ‘greatness’ or notoriety of the one that they cling too. In essence, they become ‘great’ only in the shadow of the one they bark for.
A primary source of anxiety that lives within the sociopathic narcissist is a terror of ruinous disillusionment which would ultimately terminate in a catastrophic exposure of what is in essence a fraudulent existence. As the risk of exposure intensifies, be it in a dyad or more macro group structures, their intrapsychic constellation becomes increasing more fragile and their manifest behaviour becomes more erratic.
As Timothy L. O'Brien, the executive editor of Bloomberg Gadfly and Bloomberg View succinctly put it: Two things have always driven the president: self-aggrandizement and self-preservation. Bloomberg, May 10, 2017.
Trump's need for self-aggrandizement and self-preservation is the easiest filter to use to put all Trump news through when assessing whether Canada and your income is going to be better off as a result of the news. If it is good for Trump, check your wallet.
This following interview of Trump by editors of The Economist magazine where Trump asks "Have you heard that expression ("prime the pump") used before? Because I haven’t heard it. I mean, I just…I came up with it a couple of days ago and I thought it was good. It’s what you have to do."... will probably elicit more additions to your own list of descriptors.
DONALD TRUMP, the President of the United States, along with Steve Mnuchin, the treasury secretary, and Gary Cohn, the director of the National Economic Council, sat down for a conversation with editors from The Economist on May 4th, 2017.
The Religious Right
Part of Putin's Playbook
If you want a glimpse of where we’re headed as a country, look to Russia. For years, conservatives — especially fundamentalist Christian conservatives — have held Russia as an ideal to which they could aspire. As Vladimir Putin cracked down on the free press and the rights of his Muslim and LGBT citizens, many conservatives came to see him not as a brutal autocrat but as a paternalistic defender of traditional values. Many white supremacists likewise fawn over Putin’s Russia. Neo-Nazi Richard Spencer, now famous for being punched in the face, called it the sole white power remaining in the world, and Klansman David Duke has said he believes Russia holds the “key to white survival.” J. Ryne Danielson, February 2, 2017
Why Vladimir Putin does the bidding of the Orthodox Church against the evangelical Christian religions. Copying from the playbook of Joseph Stalin, Putin revived the Russian Orthodox Church to intensify patriotic support and presents himself as a defender of Christian civilization, because he saw the church had an ability to arouse the people in a way that the party could not.
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).
The Cost of Being Canadian
even when the CAD/USD is near par
- In the U.S. for the past 55+ years the average NRoI has been +/- 2.5% and in the Eurozone has been +/- 1.7% (MonetaryRealism.com). In Canada, the "real" Bank of Canada bank rate (rate less CPI) was approaching 5% in 2007 before the 2008 crash and as well after the dot.com bust in 2001. It's flirting with zero now.
At street level in Canada earnings have been topping with the commodity crash but in many cases, earnings reliability are not even necessary to use in the calculus of risk analysis when granting a mortgage or consumer loan. We should be ashamed of ourselves, but instead we blame others.
As CIBC economist Benjamin Tal said, he is concerned that subprime lending is “driving the bus.”
Subprime borrowers’ debt loads will continue to grow as long as interest rates are low. Benjamin Tal
- Average debt levels up nearly 3% in the first quarter of 2016.
- Non-mortgage debt rose to $21,348 in 1Q 2016, up 2.7% Y/Y.
- Subprime average credit card balance grew by 5.7% Y/Y to $6,601.
- High interest installment loans grew 4.8% Y/Y to an average $23,591.
- Serious delinquency rates (90+ days late) increased 3% in 1Q 2016.
At the national level it's worse; net Federal Direct Investment widened dramatically in 2015 Y/Y meaning that Canadian investment capital would rather look for yield offshore than on. We can't even invest in ourselves (Net FDI has been negative for the last nearly 20 years); we continue to increase our borrowing so that we can consume to 'maintain' our lifestyle.
Even people without money via savings and low employment earnings are buying property - how would they know the value of money? Well they will find out along with their extended families the difference between equity and debt in an aging speculative triumph.
BMO Millennial Home Buyer Survey (March 2016)
According to the survey, millennials expect they will have to spend $350,000, on average, to buy their first home. These amounts range from about $235,000 in Quebec to more than $478,000 in British Columbia... To make such a purchase, respondents indicated that they expected to raise about 15 per cent of the purchase price for their down payment - or, roughly, an average of $53,000. Most (65%) indicated that they would rely, to some extent, on parents or other family members for financial assistance for as much as 10% of the purchase price, although most don't know.
A probability sample of this size would yield results accurate to ± 2.2 percent, 19 times out of 20.
Ipsos Reid - BDO Poll (May 2016)
55% of Canadian would have trouble paying bills if interest rates rise.
46% say rising cost of living is limiting the money they put toward paying off debts.
37% say the rising cost of living hasn’t impacted their debt payments at all, suggesting its having some impact on most people.
58% think the value of their home will increase.
The poll is accurate to within +/ - 3.5 percentage points, 19 times out of 20, had all Canadian adults been polled.
Condo Construction Subject To Red Alert From Royal Bank
HuffingtonPost.ca (May 30, 2016)
RBC isn't the only organization that has presented concerning statistics regarding the housing market recently.
Sales activity in Toronto and Vancouver may have "topped out," Canadian Real Estate Association (CREA) president Cliff Iverson said earlier this month.
Sales didn't grow in Toronto at all in April after dropping 1.8 per cent in March.
They were also down one per cent in Vancouver, after a drop of 0.3 per cent the previous month.
Gregor Robertson Mayor of Vancouver, May 30, 2016
Yes, housing prices are high in Vancouver, and global capital plays a part in that. If prices keep increasing, many of the things we love about Vancouver are at risk, and many will not be able to put down roots in a city bound together by a rich, multicultural history that has a lot to offer geographically and culturally.
Magic Bus - The Who 1968
I don't care how much I pay
I wanna drive my bus
to my baby each day
I want it
I want it
I want it
I want it
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