Time almost up at the all-you-can-eat buffet?

Canada’s current debt binge has some sounding the alarm on rate hikes. According to Macquarie Capital the unprecedented rise in consumer debt means the Bank of Canada’s (BoC) rate-hiking cycle is already the most severe in 20 years and further increases will have far graver consequences than conventional analysis shows. Assuming just one further rate rise, the impact would be 65 percent to 80 percent as severe as the 1987 to 1990 cycle, which took into account five-year bond yields, household debt and home buying. Canada’s housing market slumped in the early 1990s after that rate-hike cycle and a recession.

“The Canadian economy has experienced an unprecedented period of hyper-leveraging,” analysts David Doyle wrote in the note released in January. According to Macquarie, this is underlined by the fact that:

  • About 30 percent of nominal GDP growth has come from residential investment and auto sales over the past three years. This is about 50 percent greater than what has been experienced in similar prior periods.
  • The wealth effect from rising home prices has driven nearly 40 percent of nominal growth in gross domestic product over the past three years, about two to four times the amount experienced previously when the BoC was hiking rates.
  • Even as this has occurred, fixed business investment and exports have struggled, limiting the ability for a virtuous domestic growth cycle to unfold. This again is in sharp contrast to similar periods in the past when these were accelerating.Governor Stephen Poloz has indicated high household debt could make the slowing impact of rate hikes harsher, and that the impact of 2017’s increases will not be fully clear for 18 months, Doyle said. “When taken together, these observations mean the Bank of Canada is proceeding with hikes despite uncertainty surrounding the severity of tightening performed so far,” Macquarie writes. “This elevates the risk of policy error.” Macquarie expects only one more rate hike in either April or July.
  • New mortgage stress-test rules will also have a larger impact than estimated, Macquarie said. The new rules in isolation are expected to reduce buyers’ maximum purchasing power by as much as 17 percent. That jumps to about 23 percent after incorporating the rise in mortgage rates since mid-2017, according to the note.

New mortgage stress-test rules will also have a larger impact than estimated, Macquarie said. The new rules in isolation are expected to reduce buyers’ maximum purchasing power by as much as 17 percent. That jumps to about 23 percent after incorporating the rise in mortgage rates since mid-2017, according to the note.

Governor Stephen Poloz has indicated high household debt could make the slowing impact of rate hikes harsher, and that the impact of 2017’s increases will not be fully clear for 18 months, Doyle said. “When taken together, these observations mean the Bank of Canada is proceeding with hikes despite uncertainty surrounding the severity of tightening performed so far,” Macquarie writes. “This elevates the risk of policy error.” Macquarie expects only one more rate hike in either April or July.

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The End of the Canadian Housing Bonanza?

Canadian home sales rose to a record in December just before tougher mortgage rules took effect, helping make 2017 the second strongest market ever. Transactions climbed 4.5 percent from November to 45,976, according to a report in early January by the Canadian Real Estate Association. The national benchmark price index was little changed on the month and was up 9.1 percent from 12 months earlier. Clearly it is apparent that home buyers were racing to get ahead of more stringent mortgage eligibility rules that took effect on Jan. 1, 2018 potentially distorting year-end sales figures.

2017 was the second strongest year for sales on record, and included strong gains in prices. It will be interesting to see if monthly sales activity continues to rise despite tighter mortgage regulations that took effect on January 1st.

Sales in December rose in about 60 percent of markets led by Toronto, Calgary and the Vancouver area. The December surge brings the streak of gains to five months. Sales for all of 2017 fell by 4 percent from 2016’s record. The Canadian Real Estate Association forecasts that sales will have another down year in 2018 as demand gets weighed down by rising mortgage rates and a new federal rule requiring borrowers show they can afford payments that are much higher than current market rates.

While national home prices have come down since peaking in May 2017 it still proved to be a strong year. The 9.1 percent year-over-year price gain in December is the second largest appreciation for that month in the past decade.







Deteriorating Housing Affordability

Meanwhile, RBC Economics in a report published in December 2017 says housing affordability in Canada is at its worst level since 1990. No surprise there, nor is there any surprise to see Vancouver, Toronto and Victoria as the least affordable markets (where it will take 87.9 per cent, 78.4 per cent and 61.5 per cent, respectively, of household income to cover the cost of mortgages). Looking for relief? Saint John is Canada’s most affordable market (where 24.5 per cent of household income goes toward mortgage servicing costs).

Read more here: http://www.rbc.com/newsroom/_assets-custom/pdf/20171221-ha.pdf

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Worry = Higher Interest Rates + Covering Monthly Bills

According to a recent Ipsos poll conducted by MNP LTD., Canadians are increasingly worried about their ability to repay their debts. Since interest rates first rose in July, households across the country have noticed their budgets tightening as they struggle to keep up with expenses and manage other rising costs. Jumping eight percent since September, a full one-third (33%) of Canadians now say they are unable to cover their monthly bills and debt repayments. At the same time, almost half (48%) say they are $200 or less from not being able to meet their monthly financial obligations.

In light of the above and a little closer to home, it should come to no one’s surprise, that the recent numbers released for the Office of the Superintendent of Bankruptcy Canada reported Alberta bankruptcies increased 11.4% to 450 up from 404 the month prior. Compared to 12 months earlier personal bankruptcies in Alberta are up 2.3%. As is visible in the graph below, bankruptcies had been falling throughout 2017 until they picked up again in August and October. We suspect the Bank of Canada’s decision to increase key interest rates by 0.25% in July and again in September has been a contributing factor. With the additional hike earlier this month of an additional 0.25% we suspect bankruptcies to continue at elevated levels.


As with Newton’s third law: For every action, there is an equal and opposite reaction.



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You’re not as rich as you think

With Canadian policy makers led by Governor Stephen Poloz increasing the benchmark overnight rate to 1.25 percent last week, marking the highest level since the global recession and their third hike since July Canada also became the first major central bank to move ahead with a rate increase in 2018.

However central bank officials also repeated their dovish language about moving ahead cautiously and warned they expect the economy will require continued stimulus to remain at capacity. In an official statement from Ottawa they indicated that;

“While the economic outlook is expected to warrant higher interest rates over time, some continued monetary policy accommodation will likely be needed to keep the economy operating close to potential and inflation on target.”

“Governing Council will remain cautious in considering future policy adjustments.”

These actions and statements seem paradoxical, but at the same time we can understand why.

Pain now, or pain later is the question. Consider interest rate policy, in its base form, is simply an encourager or discourager for us on Main Street to ‘steal from our future consumption’. Once considering our ever increasing debt levels a lot of future consumption has been stolen over the last number of years!

Increasing rates inevitably makes further borrowing more difficult. The inability to steal from our future consumption will naturally create a consumption void (recession or worse) at some point.

Our proxy for Main Street sentiment from our post last week confirms our doubts in what truly has been gained from almost a decade of low rate policy.

Even those of us who have stewardly avoided debt accumulation are not immune.  With the inflationary effect of asset prices being the only real benefit of low rates now disappearing, along with aggregate demand supporting current values becoming tested, we will soon come to realize that we were never really as wealthy as we thought we were.  In other words, in the future, people will be prepared to pay much less for something we own now in comparison to what we think it’s worth today.

Because of this, both borrowers and accumulators will feel the impacts of this cyclical change. Any believers in such a thing as an engineered ‘soft landings’ being possible will be disappointed. Sentiment change is a funny thing on the way down and historically, doesn’t seem to be engineerable. Down crashes happen frequently, up crashes never. Even the slope of a parabolic rise doesn’t quite qualify as an ‘up crash’.

In conclusion we are left to conclude, contrary to Scotiabanks “You’re richer than you think” marketing campaign, you’ll soon come to recognize that “You’re not as rich as you think”

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Are Canada’s Central Bankers out of touch with Main Street or what?

In spite of a recent report issued earlier this month by the Institute of International Finance (IFF) that the world is swimming in a record $233 trillion of debt, soaring to a record $233 trillion in the third quarter of 2017 Canada’s central banker went ahead today anyways, raising rates by another .25% to 1.25.

The IFF report also indicated that global debt has increased $16.5 trillion or 8% from the end of 2016. It also reflected record highs for private nonfinancial sector debt in Canada, France, Hong Kong, Korea, Switzerland, and Turkey. According to the report one possible side effect of this massive debt burden could be a reluctance from central banks to tighten lending conditions.

No such reluctance in Canada!

What is most interesting is that polling last week of Bay Street analysts indicated an implied probability of 80% that our central bank would increase rates by a quarter of a percentage point. Meanwhile an on-line audience poll at Business News Network (BNN), our closest polling proxy to what people on Main Street think, indicated that 81% of respondents didn’t feel Canada’s economy is as strong as the recent jobs data suggests.

Damn the torpedoes! The central bankers and Bay Street analysts know best! Main Street? PPHT…what do they know.

I guess we’ll find out in the coming months. However, it’s us, the huddled masses, the plebeians of Main Street, who respond accordingly with our economic behaviour that are, in the end, the ones in charge of where the Canadian economy will head. Unfortunately, if things go bad, it’ll be Main Street that will bear the brunt.

Check out the Global indebtedness, sorted by sector:

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Thinking wisely and acting foolishly

A new CIBC survey shows a quarter of Canadians say paying down debt is their top personal finance priority for 2018 as has been for the previous seven years. And we know how well that’s been working out for households in this country. So is there any reason to believe next year will be different?

One-quarter of the 1,524 Canadians surveyed online between Dec. 11 and Dec. 12 said debt payment was their main focus heading into 2018, while some Canadians (13 per cent) will prioritize growing wealth, and seven per cent plan to focus on saving for retirement.

Over half surveyed in the poll said they regret not paying down more debt before interest rates rise and only 16 per cent said  they achieved their financial goals in 2017.

Just over one-quarter (26 per cent) of respondents said they took on new debt this past year in order to manage day-to-day expenses or deal with a financial emergency.

Going into the new year, two-thirds of Canadians (67 per cent) said they need a better handle on their finances, with 55 per cent planning to cut non-essential spending and over one-third intending to create a budget.

Additionally, twice as many people compared to last year’s survey said they will create an emergency fund and an automated savings planed.

Only nine per cent of Canadians said they don’t plan to set financial goals for the coming year.

From our view, based on the trends we see in the third party debt recovery industry we suspect another survey 12 months hence will reports numbers pretty much the same. There is nothing more predictable than human nature, most especially in an environment of historically low interest rates. Keep in mind that even in the event of an unimaginable doubling of interest rates over the next 12 months (yeah right) we will remain well below historic levels.

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Richer but More Indebted; The New Reality

According to a report released December 7, 2017 by Statistics Canada median family net worth was $295,100.00 up 14.7% from 2012 and more than double from 1999.

The Survey of Financial Security marks the first time since 2012 that the data agency has taken an exhaustive look at the financial lives of Canadians.  A person or family’s net worth is calculated by how much they would have left if they sold off all of their assets and paid off all of their debts.  The lion’s share of the gains in Canadian’s net worth has come from real estate.  Statistics Canada notes: “Housing is both the largest asset and the largest debt for Canadians.”

Additionally, Statistics Canada indicated in December that household credit market debt as a proportion of household disposable income increased to 171.1 per cent in Q3-2017, up from 170.1 per cent in the second quarter. That means there was $1.71 in credit market debt, which includes consumer credit and mortgage and non-mortgage loans, for every dollar of household disposable income. This amount Canadians owe relative to their income is an all-time new record high.

With homebuyers rushing to get into the market ahead of the new OSFI rule change that takes effect on Jan. 1, 2018, we will likely see a further increases in credit market debt ratios for Q4.

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In Praise of Profit

It may be politically incorrect to say this today. But, that doesn’t make it any less true. It’s good when businesses make money. Profits are important to the Canadian economy. They’re what generate jobs. They’re the mainstay of prosperity for the middle class—and for all Canadians.

It’s a fact all too often forgotten in today’s policy environment. Governments at all levels seem more intent on raising taxes on business rather than lowering them. Regulatory compliance costs are rapidly increasing. Governments are getting ready to unleash a flood of new charges and user fees for regulatory approvals. And, minimum wage rates and payroll contributions are being raised more rapidly than the cost of inflation. Whether it’s with respect to improving environmental performance, workplace health and safety or product standards, the first reflex of government is to regulate and penalize, rarely to provide positive incentives for business to make the investments they need to be able to modernize and comply.

Clearly, these are measures put in place by people who know nothing about business finance, who all too often think that higher business profits come at the expense of jobs and social policy goals. Just the opposite is true. It’s when businesses are profitable that they’re able to grow, create jobs and invest in the new products, processes and technologies required in order for them to meet more stringent stakeholder expectations while remaining competitive.

The record of the last 30 years speaks for itself. First, look at the relationship between business profits and jobs. The more profitable Canadian companies are, the lower Canada’s rate of unemployment is. Changes in profitability (measured in terms of after-tax profits as a per cent of GDP) are followed immediately by changes in the unemployment rate. Canada’s unemployment rate goes up only when profit margins come under pressure.








Next, look at the relationship between corporate profits and capital investment by Canada’s business sector. Changes in the amount businesses invest in non-residential structures, machinery and equipment follow closely on changes in after-tax profits. Simply put, profit drives business investment. The most effective thing governments can do to incent companies to invest more in innovation, productivity enhancing technologies and improved environmental performance is to leave more money in the hands of business to make those investments.








The role profits play in driving business growth and assuring economic prosperity for Canadians should be a fundamental tenet of all government decision-making. Our governments must at least be aware of the negative impact higher taxes and regulatory compliance costs have on profits, job creation and business investment. It’s an important message for all of us to convey.

So, let’s celebrate profit this holiday season! Let’s create jobs, incent investment and ensure greater prosperity for Canadians by championing a more profitable environment for Canadian business.


Contributed by: Jayson Myers Senior Vice President, Policy – Canadian Chamber of Commerce 613.238.4000 (ext 243) jmyers@chamber.ca

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GIVE – Just Do It

Some of the most troublesome aspects of gift giving are the materialism and commercialism that are so inextricably woven into the fabric of Christmas and the attendant pressure of giving gifts to others out of a sense of obligation, rather than freely out of love.

While we can all identify with such pressure, it is important to recognize that perversions do not in and of themselves invalidate the practice of giving gifts. As followers of the One who gave Himself for us, we ought to exult in the very notion of giving to others. As such, having the unique opportunity of giving to ministries that propagate the gospel, of giving to the downtrodden and oft-forgotten, and of giving to family members and friends should overwhelm us with joy—especially when there is no expectation of giving to get. Jesus’ teachings in this regard are instructive.

While dining at the house of a prominent Pharisee, Jesus admonished the guests (and presumably the host as well), saying:

When you give a luncheon or dinner, do not invite your friends, your brothers or relatives, or your rich neighbors; if you do, they may invite you back and so you will be repaid. But when you give a banquet, invite the poor, the crippled, the lame, the blind, and you will be blessed. Although they cannot repay you, you will be repaid at the resurrection of the righteous (Luke 14:12–14).

Far from suggesting that it is inappropriate to show kindness and generosity to family and friends, Jesus highlights the reality of genuine kindness and generosity motivated by love for others as opposed to the expectation of favor in return.

This Christmas season may we give with a grateful heart, as we too have been given. Far from a burden, giving can become an extraordinary blessing. As such, whether you are inscribing a Christmas card or purchasing a gift for a loved one, do it all with a grateful heart and a song upon your lips. And “when you give to the needy,” remember the words of the greatest Gift of all: “Do not let your left hand know what your right hand is doing, so that your giving may be in secret. Then your Father, who sees what is done in secret, will reward you” (Matthew 6:3–4).

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We’re on the Hook for the Lack of Prudence of Others!

As Canadian household debt hit an all-time high in 2017  a new study by TD Bank finds that 97% of Canadian homebuyers say they wish they’d factored in their other financial obligations when determining the mortgage they could afford. (Too bad their mortgage broker/architect/advisor was not required to factor these ‘obligations’ into their loan approval consideration either.) We are not talking about extraordinary, unexpected expenses here: 54% of those surveyed wish they’d considered property taxes and maintenance costs, and a third cite overall lifestyle expenses.

Lenders have been encouraged to be more lax in their approval process, because Canadian taxpayers are backstopping some 55% of Canada’s $1.6 trillion residential mortgage loans –$496 billion through CMHC, plus 90% of the $400 billion+ underwritten by Genworth MI, plus an undisclosed exposure through Canada Guarantee co-owned with the Ontario Teachers’ Pension.

Presently Canadian mortgage defaults are near cycle lows: less than .5% of residential mortgages held by the largest lenders are today considered delinquent (behind on monthly payments). But as acknowledged in the CMHC Q2 financial report:

The most important vulnerability is Canada’s high level of household debt, which could amplify the impact of an economics shock if indebted households begin to deleverage or struggle to repay their debt balances…

With property prices in major Canadian markets today considered the most over-valued in the world, it is prudent to consider what happens  when property prices mean revert, potentially taking prices below outstanding mortgage amounts so that owners are ‘underwater’ as seen in the 2006 US housing bust.

All insured residential mortgages in Canada are ‘full recourse’ meaning that if a borrower defaults and the property sale recoups less than the mortgage, the insurer pays to make the lender whole, and then sues the borrower to recoup the shortfall. But with so many high-ratio mortgages outstanding (minimal owner equity) along with other large unsecured consumer debts, and typically low liquid savings, the incentive for the debtor to file for bankruptcy is large.

As Canadian insolvency manager Scott Terrio points out in MacLeans this week, in the event of a shortfall (and default), the balance owing becomes unsecured—just like any credit card or unsecured line of credit—and the lender must then rely on the civil court to collect on the loss (shortfall). But a lender cannot take court action when a Canadian insolvency proceeding is underway, nor afterward as the debts are then legally discharged. See: Here’s how Canadians could walk away from their homes if house prices fall:

“…you can essentially walk away from your home in Canada, no matter the amount of the shortfall, if you file a bankruptcy or a proposal with a Licensed Insolvency Trustee. The estimated shortfall gets included as a normal unsecured debt for which the lender files a proof of claim, and it is discharged. No other recourse is available in the courts to the lender.

In my experience, this is a very little-known fact, even among those who are quite financially sophisticated…

The bottom line: in bankruptcy and creditor proposal filings, defaulting Canadian homeowners will leave losses to their lenders. And where those losses have been insured by the Canadian government, the losses will flow to us taxpayers. In the cleanup phase of the largest property bubble in Canadian history, this is likely to happen more than most imagine possible.

The above post by Danielle Park originally appeared on Michael Campbell’s MONEYTALKS found here: http://moneytalks.net/article-and-commentary/todays-best-money-making-ideas/real-estate/20798-when-canadian-homeowners-walk-away-from-negative-equity-taxpayers-at-risk.html



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