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

Two Minutes to Midnight

4/23/2019

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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

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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

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Yields Dropping

3/13/2019

Marc Goldfried, head of Canoe Financial Fixed Income talks with BNN Bloomberg about dropping yields confirming a weakening economy.

The Bank rate has been 2% for the last five months but the Bank of Canada 2yr and 10yr benchmark bond yields are indeed inverted to the Bank Rate as I have noted on my Yield Curve chart (FEB 2019)

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.

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Thanks to Jesse Felder @jessefelder and
Tuomas Malinen @mtmalinen for the charts above.
Today, March 13th 2019, the live
Canadian Productivity Chart exhibits a slowdown.

Oil <23

12/31/2018

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As we wait for the December real estate data, let's look at some year end charts.

First up is Henrik Zeberg @HenrikZeberg who is suggesting that the price of oil is headed down to less than USD$23.

Notice where oil was trading in 2001-2002 and 2016.

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."

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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 Canadian Dollar continues to plunge. That means our import costs go up and our net trade has been negative 8 out of the last 11 prints; ie: we Canadians buy more than we sell which is ok if we have the income to service the debt, but as the Chinese economy slows and they buy less of our resources, our incomes as well as other countries incomes are going to diminish.

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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.

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As Rick Ackerman reminded his clients on December 30, 2018:

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.

Since the start of ZIRP and NIRP it has been difficult to "be a deflationist" as we watched the global bubble of everything inflate; resource assets, equities, debt and of course real estate which Canadians with the help of foreign laundry services have pushed real estate prices into the top tiers of global pricing. In November 2018, I posted "Dirty Real Estate" which highlighted the "Vancouver Model" that has spread throughout Canada.

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

e don't even know what the "value" of the crime is, but we know what the effect has been in terms of FOMO debt taken on by Canadians. Real estate prices have peaked in Canada and as they drop, the FOMO crowd has a tough choice to make: turn debt into equity quickly by selling the asset or stay in for the long haul and meet the amortization obligation. If it's the former, look for price drops to happen quickly as vendors compete for a diminishing supply of buyers; if it's the latter look for a slow Japanese style deflation and a return to savings as noted in my 2012 post "What Do You Do During a Housing Bust".

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.

And below, see Chris Kimble's
December 31, 2018 note to clients:

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Strength in Gold of late has it (the Gold/USD ratio) breaking above the top of this trading range at (2). What the ratio does at this resistance test will send an important message to the metals sector for the next few months.

CLICK HERE if you want a free trial of Chris Kimble's peerless financial market technical research.

Equities and Bonds

10/14/2018

Why The Stock Market Is Heading For Disaster
In this presentation, Clarity Financial's economic analyst Jesse Colombo explains why the U.S. stock market is experiencing a dangerous bubble that is going to burst violently and cause serious damage to the underlying economy. Published on Oct 11, 2018

Hat tip to Jesse Colombo for the following 14 minute video that includes the following 20 long term charts:

S&P 500 since 1997
Percent equity gains since 2009
Interest rates since 1997
Real Fed Funds rate since 1990
U.S. corp debt since 1980
U.S. corp debt as a percent of GDP since 1980
Buybacks and dividends paid vs S&P 500 value since 2000
S&P 500 vs NYSE margin debt as percent of GDP since 1997
Retail investor allocation to stocks vs cash since 1997
CBOE volatility index (VIX) since 1997
St Louis financial stress index since 1997
BAML U.S. high yield spread since 1997
Cyclically adjusted P/E ratio since 1980
U.S. stock market capitalization to GDP ratio since 1971
Tobins Q ratio since 1902
U.S. net corp profits as a percent of GNP since 1947
FAANG stocks vs S&P 500 since 2009
Fed Funds rate and recessions since 1997
Financial banking crises and recessions since 1977
10-2 year treasuries spread since 1976

Trump Is Completely Misguided On Interest Rates

If the Fed or other central bank voluntarily abandons further credit expansion (most commonly by raising interest rates), the credit and asset bubble will experience a deflationary bust. Deflationary episodes entail credit busts, falling consumer prices, bear markets in stocks and housing prices, and falling wages. If the central bank decides to never put an end to the credit expansion (for example, if the Fed never raised rates), however, the result would be a runaway credit and asset bubble that leads to a severe decrease in the value of the currency and high rates of inflation. The latter scenario is what would occur if President Trump got his way – hardly a desirable outcome for the economy. To summarize, the Fed is crazy – they’re crazy for creating such a large bubble in the first place via loose monetary policy, but not for raising interest rates and normalizing their monetary policy. Jesse Colombo, Oct 17, 2018

Market Bear Hussman Says Stocks Could Lose $20 Trillion

To state the obvious, bull markets do not last forever, and inevitably are followed by bear markets. Likewise, economic expansions also must end at some point, followed by recessions, and recessions typically are accompanied by bear markets. John Hussman, Oct 15, 2018

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The table above from current stock market bears is warning about a pending major stock market correction of 20%, 30%, 40%, 50% or 60% while past major corrections came in at 83% in 1929, 34% in 1987, 49% in 2000, and 57% in 2007.

My fantasy Plunge-O-Meter for September 2018 is showing a potential 51% average drop for Canadian housing prices for the 6 biggest markets in Canada if buyers go on strike.

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Buyers outside of Canada in other housing bubble cities are thinning in number.

There's trouble ahead in the global housing market
Source: Business Insider July 2018

Toronto: Prices clearly peaked in early 2017. Prices are now down 3% vs last year. (Toronto SF Detached are down 17% from the peak. See the Sept 30, 2018 Plunge-O-Meter)

Syndey: Compared to last year, prices are now down 5% and supply has ballooned 22%.

Stockholm & Vancouver: Over a recent 6-month period, prices in the luxury property market fell 9% and 7.6%, respectively.

New York City: In Q1 2018, prices were down 8% YoY and sales were down 25%. NYC's luxury properties fared even worse.

San Francisco: After hitting a record price high in January, the city has seen a rare spring decline in prices, while rents across the SF Bay Area are starting to "cool off"

Bond King Gundlach predicts yields
much higher before this move ends

"If you look at the charts and you look at the way the market's behaving and you think about the trends that are underneath the bond market, it wouldn't be surprising at all to see the 30-year [yield] go to 4 percent before this move of the breakout above 3.25 percent is over," he said on "Halftime Report" Thursday. CNBC, Oct 11, 2018

Bond King Gundlach predicts yields are headed much higher before this move ends from CNBC.

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Looks Like Canada

9/21/2018

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"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
ABC.AU NEWS Sept 2018

The above sounds like it, but no,
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

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"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

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CAD Low

6/27/2018

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The Canadian Dollar hit a new low today in it's path to a bottom. This is not good news for foreign buyers who bought real estate in the FOMO craze since the pit of gloom in March 2009.

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.

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Canada is a country of consumers of U.S. production and services and as the USD rises in value so will our cost of living.

For the moment total CPI remains at 2.2% (StatsCan) but the Canadian Yield Curve warning mounts and as Chris Kimble notes below, a U.S. Dollar breakout "...would likely effect the portfolios of investors around the world".

Is King Dollar Creating A Bullish Head & Shoulders Pattern? by Chris Kimble June 28, 2018

King Dollar is a major player in the financial markets. And its moves are especially important to commodities and emerging markets.

Well, portfolio managers and traders in those markets may want to pay attention to today’s chart because the US Dollar may be setting up for a big move. Back at the end of February, we highlighted why the US Dollar was ready to bounce.

That post was written just as King Dollar was testing a confluence of support and nearing resolution from a bullish falling wedge pattern (point 1 on the chart below). Here’s an excerpt:

FROM A TECHNICAL VIEW, THE DOLLAR IS ATTEMPTING TO POKE ITS HEAD ABOVE A BULLISH FALLING WEDGE PATTERN. THIS ALL OCCURRING AFTER HITTING A CLUSTER OF PRICE SUPPORT.

Well, the Dollar did bounce higher. And if today’s chart pattern is a precursor, King Dollar may be ready to morph this bounce into a full-blown rally.

We are testing lateral resistance at the November 2017 highs (point 2). Could this resistance prove to be the neckline of a bullish inverse head and shoulders pattern? It’s currently an incomplete pattern, but even the slightest pullback could form the right shoulder.

In any event, a breakout here would be very bullish for the Dollar (NYSEARCA:UUP). And this would likely effect the portfolios of investors around the world. Stay tuned!

Or get a FREE TRIAL discount to Chris Kimble's peerless financial market research

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Boom or Bust Interest Rate Edition

2/28/2018

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Chatter on Twitter was heavy yesterday about potential rate increases for 2018. I mash-upped the CoreLogic chart to the left with yesterday's spike in the 2 and 10 year yields (via ZeroHedge 2yr chart and 10yr chart).

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

15% mortgage payment increase? That's gonna cut into renovation plans and dreams of a new truck in the driveway.

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

Today, February 28, 2018 the Canadian 10yr yield is ticking down as traders bet on higher prices not higher yields:

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Inversion Report

1/27/2018

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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.

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.