"Canada Is In Serious Trouble" Again, And This Time It's For Real

Tyler Durden's picture

Some time ago, Deutsche Bank's chief international economist, Torsten Slok, presented several charts which showed that "Canada is in serious trouble" mostly as a result of its overreliance on its frothy, bubbly housing sector, but also due to the fact that unlike the US, the average household had failed to reduce its debt load in time.

Additionally, he demonstrated that it was not just the mortgage-linked dangers from the housing market (and this was before Vancouver and Toronto got slammed with billions in "hot" Chinese capital inflows) as credit card loans and personal lines of credit had both surged, even as multifamily construction was at already record highs and surging, while the labor market had become particularly reliant on the assumption that the housing sector would keep growing indefinitely, suggesting that if and when the housing market took a turn for the worse, or even slowed down as expected, a major source of employment in recent years would shrink.

Fast forward to today, when the trends shown by Slok two years ago have only grown more acute, with Canada's household debt continuing to rise, its divergence with the US never been greater...

... making the debt-service ratio disturbingly sticky.

Making matters worse, recent trends in average hourly earnings show that if the US Federal Reserve is concerned with US wages, then the Bank of Canada should be positively terrified.

As BMO writes today, the chart above "looks at the 2-year change (expressed at annualized rates), which takes out some of the wonkiness in monthly readings. It’s pretty clear that the trend in U.S. wages has moved up from a sub-2% pace in the early years of the recovery to around 2.5% now. Not a huge move, but still significant. On the other hand, Canadian 2-year wage trends have collapsed to barely above 1.5%, after being above the U.S. pace for most of the recovery. This is a much bigger concern/issue than the modest cooling in U.S. wages in the past few months (which could just be a statistical quirk)."

And yet despite all these concerning trends, virtually all of these red flags have been soundly ignored, mostly for one reason: the "wealth effect" in Canada courtesy of its housing market grew, and grew, and grew...

Looking at the chart above, last month Bloomberg said:

On a real basis, Canadian housing prices experienced a much smaller, shorter decrease in prices during the financial crisis and a much larger, longer increase in prices during the recovery. When you couple this unfathomable rise in housing prices with near-record high household debt-to-income ratios, the Canadian housing bubble starts to look scary should the tide turn.

... and added:

No one knows when insanity like this will come to an end. Bubbles are like an avalanche. The longer they build up, the worse they will be when they eventually destabilize.

Well, nobody may know, but as Harley Bassman said yesterday, one can make an educated assumption, and as he said it most likely will be the result of higher rates.

Which brings us to today's decision by the Bank of Canada to hike its rates for only the first time since 2010, sending the Loonie to the highest level since August 2016.

But aside from the surging currency, now that Canada has set off on a rate-hiking path, it has a bigger problem, one whose absence for so many years allowed the "Canadian housing bubble" in Bloomberg's words to flourish: suddenly rising rates. As CBC reports, Canada's five biggest financial institutions immediately increased their prime interest rates on Wednesday, shortly after the BOC hiked by 0.25bps. The Royal Bank of Canada was the first to announce an increase, followed by TD Canada Trust, Bank of Montreal, Scotiabank and CIBC. Effective Thursday, the prime rate at the five banks will rise to 2.95 per cent from 2.7 per cent, matching the 0.25 percentage point increase to the Bank of Canada's overnight rate.

But the bigger problem is not so much rising short-term rates, but what is going on on the long end: it is here that the pain for the housing market will be most acute, because as 5Y rates have doubled in the recent past, the 10Y yield is now at the highest level it has been since May 2015 and rising fast.

And as US homebuyers from the time period 2004-2006 remember all too vividly, there is nothing that will burst a housing bubble faster than a spike in mortgage rates.

Which is why while Torsten Slok's original warning that "Canada Is In Serious Trouble" two years ago may have been premature, this time it appears all too real thanks to none other than the Canadian central bank, which may just have done the one thing that will finally burst the country's gargantuan housing bubble.

Finally, for those skeptical, here is David Rosenberg explaining why he is 'skeptical' about BoC's view of a robust economy ahead...

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Kayman's picture

WTF?

You have no rights fighting against your own country on a foreign battle field.

Justin Case's picture

“An opinion should be the result of thought, not a substitute for it. ”

Savvy's picture

As far back as Jan 2015 when the article was written? Speaking of retard mode and all eh?

 

Sockeye's picture

The postmodern destruction of values is not limited to morality.

abyssinian's picture

Where is Canada? and why would anyone gives a flying rat's a$$ if Canada is in trouble? When are they ever out of trouble? weh weh weh, A A A 

Justin Case's picture

Khadr's ticket out of Guantanamo should never have been a guilty plea extracted by torture, fear and despair. Every other western country was getting its citizens out, while Canada let a teenager rot there.

Khadr's passport out should have been the birthright he was born with—his Canadian citizenship.

HappyDeathMetal's picture

Wowzers, youz merricans reeyaly hate us canucks up here eh?

dogballs's picture

No we're going to take over Canada soon though.

Quantum Bunk's picture

Heard it all before. We have transcended reality in finance. Nothing will change.

 

Nothing will crash

peopledontwanttruth's picture

This article reminds me of a mother saying to Johnny

Johnny if you don't stop writing on the wall this time you're in really big trouble, and I mean it this time, 1, 2, 2 1/2, I mean it. 1, 2,

D Nyle's picture

explains why they are the number one overstayers

BLOTTO's picture

Im having a donut and coffee here at a Tim Hortons right beside my pot dispensary and everything seems pretty cool to me.

38BWD22's picture

 

 

Bravo!  Stay out of debt, and you'll be sooooo cool the ladies will drool...

Nobodys Home's picture

Ladies always checkin out my ass!...Cause I got a wallet bulging with 100s.

logicalman's picture

Don't kid yourself, it's the wallet that they are checking out.

 

Enceladus's picture

I thought it was clever 

FIAT CON's picture

How many Salmon gobbling seals does it take to be cute 2,10, or 200 more.

Wheres has all the Salmon gone? Into the thousands of protected seals belley's

Savvy's picture

We are burning down in BC. Happy?

oddjob's picture

No, worse even is the RCMP choosing to throw spike belts under peoples cars trying to get back home to save their pets.

troubadourcapital's picture

Canadas real estate market is indeed in trouble. At this point, it's only the Chinese speculators who are buying. And even they are pulling back

pitz's picture

Chinese participation in Canada's RE market has been statistically negligible for a long time. Largest foreign participants are, by far, Americans.

Luc X. Ifer's picture

Pitz as usually prompt on duty to refute any atempt to expose the reality of the Canadian housing Ponzi scheme. Had high stack in the game going Pitz?!

TheManwhoStaresatSheeple's picture

Unfortunately Pitz is probably right:

Canada's economy (GDP) is around C$2,100 billion.

At this level 1% growth is around C$21 Billion.

Total debt increase in Canada according to Cansim table 378-0122 (households, non-residents, all levels of government and the business) is:

2014 - ~C$366 Billion

2015 - ~C$678 Billion

2016 - ~C$321 Billion

And FYI to total amount on all the residential real estate in GTA (from Hamilton to Oshawa to Lake Simkoe) for 2015 was around C$ 63 billion.

Greater Vancouver was around half of that.

Total debt at the end of Q1,2017 was a monstrous C$7,354 Billion (around 3.5 times the GDP).

BeanusCountus's picture

What is total debt to US GDP under same metric?

BurningFuld's picture

Do we tax them Americans at 15% too? Or does be'in neighbours help? And who gets that 15%?

VZ58's picture

Your comment is based on what exactly? Pixy dust? Are you retarded or do you live under a rock? Go to Hongcouver or Toronto and wake up.

jusman's picture

So the funds get routed to a relative/friend/associate that is a Canadian resident who buys the house on the foreigner's behalf, with a private side agreement to state that it is the foreigner's property.  I wonder how often that takes place....

BurningFuld's picture

I think an arrangement like that would be extremely rare 'caus people just loves pay'in taxes.

opport.knocks's picture

That Ponzi is more like what the Indian (Sikh and Hindu) community does. A large extended family buys multiple properties, each claiming one as a principal residence (one is capital gains tax free) while they all really live in one or 2 of them. They then flip the properties (among themselves if necessary) to get tax free capital gains and to qualify for more debt on the next even bigger property. 

I will not shed a tear when that Ponzi collapses.

Sonny Brakes's picture

Why would you say such an insensitive thing? Canada's a big place, it won't be that easy to burn down. I do envision the Americans trying to take it over one day, just as they'll probably want to take Mexico too.  

August's picture

To the great American Eagle... with its talons at the isthmus of Tejuantepec, and its beak at the North Pole!

- some 19th Century USA Worthy 

bidaskspread's picture

The headline made me think the NHL was going on strike.

rejected's picture

Guaranteed, Americans have a greater debt to income than that chart is showing...

HalinCA's picture

Uhh ... you mean before or after we default on it?

Too-Big-to-Bail's picture

Not only that but although the GDP per capita in USA is higher than in Canada, there is much higher income equality in Canada, which will help Canadians ride out when the bubble bursts overall much better (less deflationary downward spiral of less spending > businesses downsize > higher unemployment > even less spending, etc).

Toxicosis's picture

Nope, sorry.  Us Canadians have massive credit card and line of credit debts.  We have the second highest debt to disposable income.  And most people I know are living paycheck to paycheck while paying the minimum on their cards.  We are just as reckless as anyone else in any other country out there, if not worse.  Stop trying to make yourself feel better, the granite wall awaits and we are barrelling towards it at 300mph. 

pitz's picture

Hiking rates when the economy was already in month-over-month deflation, with incredibly weak YoY inflation, and a currency that shot up ~10% against its largest trading partner? With house price declines accelerating now that the bubble seems finally to be letting out its steam?

Absolutely insane and not supported by the evidence and the data.

 

 

In.Sip.ient's picture

What does the GWN actually buy from the US?

What does the GWN actually sell to the US?

 

And where pray tell have you seen "deflation" in the GWN???

 

Don't forget, the BoCs job is to follow the US FED in lockstep

with a suitable delay to appear "independent"  ... thats it.

 

asteroids's picture

The ramp in the Loonie is absurd. If it continues, we'll be having people taking million dollar loans and buying US assets or gold or bitcoin.

VZ58's picture

Those of us without debt are laughing. Can't wait for more BOC rate hikes and then the pain will get all too real. Go Loonie go...

Toxicosis's picture

Just hope that any companies you depend on for food don't go belly up.  I'm also without debt but the pain, stress and suffering will not leave us unscathed.

Braverdave's picture

I hope it ramps up faster tha the US $ and if it does I will be scooping up more gold again. It would be nice to see it at par again like several years ago ...

pitz's picture

The BoC's job is to keep inflation at around 2% in Canada.  Its a battle they've been losing lately as deflation seems to be more of the trend. 

BurningFuld's picture

pitz there fucking job is to retire and not hire any new people. AND Oh my fucking God interest rates went up 0.25% Holy fuck!!!! When I bought my business 25 years ago my loan was 13% and at the time that was a really good deal. How times have changed. Thanks Bank of Canada Retards.