"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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VZ58's picture

The interest rates haven't been a problem in a longtime for business. iI is the insane social re-engineering that is going to destroy Canada with the idiot clown in charge. Who wants to hire idiot millenials who don't want to work and when the minimum wage hikes and the living wage BS is already happeing? Nevermind the taxes these a**holes keep raising. They will kill off any business as we all head to the USA.

BurningFuld's picture

You mean just like his father before him? Didn't see that one coming.

Sonny Brakes's picture

I am pretty sure those trains and transport trucks crossing the Canada-USA border aren't flowing back and forth empty?

lesterbegood's picture

Yep. The "13th" Federal Reserve District

Slippery Slope's picture

There is ZERO GOLD in Canada's Reserves.

There used to be 1500 tons, but they were sold off by Harper and Trudeau. Just stupid

pitz's picture

Except that Canada has taxation power over a disproportionate chunk of the world's gold mining sector.  So Canada will do okay.

Quantum Bunk's picture

No that gold will stay in the ground if its not taxed competatively

VZ58's picture

There ain't no siginificant mining of any kind happening in Canada under this corrupt eco Nazi government. Don't you read the news? We're all going to get rich in high tech and diversified eco economies! Well that or the ususl: more government jobs. The only thing keeping this country afloat is the housing bubble and low interest rates. Pain is coming if you have debt...

BurningFuld's picture

Somewhere I know there is a selfie of Trudork with the gold. Has to be.

Fester's picture

Damn Straight

 

Some of it landed in Festers safe place(s) er uh...

peopledontwanttruth's picture

I remember that too. So then this is Canada's situation

https://youtu.be/pH1XJi8XvUc

Sonny Brakes's picture

There's a lot of gold still in the ground. Money in the bank.

ThirdWorldNut's picture

May be central bank anticipates that all the immigrants Trudeau has been incessantly welcoming would create more demand for hijabs, suicide vests and benefits. Hiking in anticipation of demand side inflation ;-)

HalinCA's picture

Indeed, the 'broken window' model to spur GDP growth!

oddjob's picture

Trudeau's best plan to get the economy going is holding a pride parade every other weekend.

balz's picture

And kissing a unicorn.

CNONC's picture

They can take a tip from Atlanta and paint the crosswalks in the LBGT rainbow colors, for $200,000 per intersection. 

OliverAnd's picture

With his participation of course

smallbedbug's picture

Yeah right, all is good.

VZ58's picture

If you are asleep at the wheel...

Andizzle76's picture

They brought in immigrants to blow shit up so there construction workers always have work.

OliverAnd's picture

No they didn't.  They brought them in to drive taxis, on their spare time uber away and work as janitors, baristas at Tim Horton, Starbucks.  They brought them in to fill low paying positions so that they can buy groceries, clothing twice the price than that at in USA.  They brought them in to work and rent for their entire lives indebted to banks for the rest of their lives.  Wonder how safe Canada will be when it all crashes and they realize what suckers they are;  the black economy will flourish just like it does in the countries from which they came from. 

Righttoarmbears's picture

You cant be talking about the same open and inclusive liberal utopia that Trudeau says is a shining example to all the world!! and i typed that with a strait face just :) :)

logicalman's picture

I've spent a decent amount of time in US.

I live in Canada.

I'm glad it's not the other way around.

I guess, based on your spelling that your face is a narrow body of water connecting two larger bodies!

I do agree, however, that bears should be armed ;-)

Righttoarmbears's picture

 you leave us Dyslocksys aloon you winker (did you hear about the Dyslexic pimp he bought a warehouse)

logicalman's picture

A bit like the dyslexic devil worshipper who sold his soul to Santa!

VZ58's picture

The reason you live in Canada is because you think that the welfare state will look after your health care as you age. Got a surprise for you if you get really sick my friend. You obviously haven't been in a Canadian hosptial on Saturday night.

Righttoarmbears's picture

i live in the UK where apparently we have the NHS? a model healthcare system, but even that turns into a shit hole on a Saturday night when the local 2 pint heroes have finished beating each other, overload any system and it will go to rat shit, = 5 hr wait in A&E  especially when you have more taking out than putting in, becoming a global problem not national one.

logicalman's picture

I have been in a Canadian hospital on a Saturday night, after an almost fatal mountain bike fall. I got treated very well and promptly - didn't have to concern myself with finances.

My mountain bike is part of my health strategy that mostly works, so long as I don't fall off the damn thing.

My strategy is to eat well, excercise like a madman and get plenty of sleep. I'm 62 and in better shape than most 30 year olds, so it seems to be working.

US is the only developed country I can think of that doesn't have some sensible form of healthcare. No system is perfect, but the US system truly sucks. I have a good friend who moved to the US. The only thing he really misses is a decent healthcare system.

Toxicosis's picture

Isn't it nice to use other people's money when you get hurt.  Our disease care system is long in the tooth here in Canada.  It can take people between 6 months or two years to see a specialist, thus why people say fuck it and fly to Mexico or India to get things corrected.  I don't like to stolen from so the government should be totally out of funding health care and you pay for it out of your own pocket as you would a new bike, food, clothing, cigarettes, booze, lottery tickets, a new car, a new house, or eating out.  Stop thinking that anyone should be paying for someone else's problems.  We are now terribly non-self reliant and that is going to kill us as a society as the money runs out.  And yes Venezuela is our next stop.

logicalman's picture

Based on how often I interact with the healthcare system, I have likely paid at least twice over for any help I've had.

I guess, if you see someone lying bleeding in the street you want them to give you their credit card before you will help them stand up.

What a fucking arsehole.

Hopefully something in the future will smarten you up.

 

Toxicosis's picture

And why not.  They are still getting someone else to pay for it.  They can have the care and then they get the bill.  Why do you think healthcare is so fucking special?!!  Healthcare is a service not a right nor even a privilege.  Can you just get a free car, free food, free booze, free drugs and stick it to someone else.  Fuck no you can't.  And if you can afford to take vacations on credit, pay for booze, coffee, cigarettes, eat shit everyday,  or become obese you can damn well put money aside for your own fucking healthcare.  Why does anyone owe anyone free anything!!!.  You're acting so fucking entitled but I'm the asshole!!!

Listen I look after myself very well, eat healthy, no smoking, no coffee, no drugs, casual drinker, work out 5-6 days a week and I watch tons of dumb ass motherfuckers blowing my hard earned labor and stealing my fucking money through taxes to pay for their lifestyle of fucking up their health.  That is their problem.  If someone gets into an accident than they should buy private health insurance to cover such possibilities.  But since most people screw their own health up and are sedentary, how is that my problem.  If you don't take personal responsibility for your own health, why the fuck should I??

Kayman's picture

Medical care, government or otherwise, for catastrophic disease all makes sense.

But my observation is about 50% of medical care is for people that deliberately live via smoking, drinking, overeating and taking drugs.

The Social Safety Net long ago became the Social Hammock.

OliverAnd's picture

I am sure if the US had 13% taxes on over priced items healthcare would be free...  besides all rich Canadians go to the US for treatment.  If you truly knew anything about medicine in Canada you would know that most procedures follow US and European procedures.    The healthcare system is not free and in comparison to most healthcare systems from the western world is much below average.  There is little to no innovation in Canada when it comes to medicine.  

OliverAnd's picture

Forget about Saturday night...  24/7!!!  Some don't know how to take your blood pressure...  but daddy,mommy or sibling who are faculty had a helping hand.   

Glyndwr will return's picture

Hell is coming . And not just in Canada . Even if you know, it's hard to prepare.

emersonreturn's picture

serious question:  where, when have RE prices had such outside forces?   apparently china prints nearly half a billion a month & makes household loans relatively easy therein allowing anyone that was a peasant (with otherwise few or no great expectations) the opportunity to borrow outrageous sums &, given said peasant is sufficiently clever to figure out how to get it off shore & into as much property as said peasant can secure, a future of dizzying dollars & wealth---is this factored in?   if so i haven't seen those charts, projections. or are the charts flaunted most often simply routine old spin going on assumptions proved before this but essentially no longer relevant?  is it possible canada can ride this as long as china continues to print & that it's own performance, output, growth is irrelevant?  IMO--too bad the fed gave all its print to jamie & goldman rather than a small % to a few industrious murican canuck peasants.  sigh.

Quantum Bunk's picture

China does not print like the Fed does. Creating loans is not the same as buying loans with base money. The real offender is the US

Troy Ounce's picture

US$ 69B per day, I read on ZH.

Kayman's picture

"China does not print like the Fed does."

Yes, you are right. But for the wrong reason. China prints far in excess of the Fed. And out of the same thin air that the Fed uses.

pitz's picture

Chinese involvement in Canadian RE is next to nil. 

Foreign reserve accumulation exceeds the number of CAD$ being exported offshore to pay for imports.  Money is leaving, not entering Canada.  Thus, net foreign investment in Canada is less than zero, negative. 

"Chinese" get blamed because they're not a very well organized group in Canada and they tend to remain more culturally pure than others.

emersonreturn's picture

thanks QB & pitz.  much appreciated.

CNONC's picture

Net foreign investment in Canada is positive, by about $63b.

 http://www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/econ01b-eng.htm

The positive foreign investment is a consequence of the cuurent account deficit.

http://www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/econ01a-eng.htm

Note that the current and capital accounts do not account for the citizenship of the actors, only there place of residence.  That is, foreign citizens resident in Canada are considered Canadian entities for purposes of these figures.  A significant amount of property acquired by Chinese residents is hidden in the "portfolio investment" category, as the money is deployed by Canadian residents operating real estate investment vehicles funded by Chinese money. 

That said, I suspect you are mostly right about this being a domestically fueled bubble.  That 63 billion is a lot of money, but, even if all of it was directed to real estate, I don't think it could drive the prices we're seeing.

 

 

The Real Tony's picture

Any other explantion when the average family in Vancouver makes $80,000 Canadian a year but has to pay two million dollars for something that resembles a house? There can't be that many grow-ops.

pitz's picture

Extremely leveraged speculators. 

VZ58's picture

Extremey leveraged buyers to be sure. They are going to be in for a big surprise soon. But once again...let's see some stats to back up your claims about all those negligible Chinese.  All I see is BS from you in this regard. Americans are important, but Chinese money has fueled the housing boom in BC and is doing the same in the big smoke. It is falling off now to be sure but it is not negliglbe. That is garbage. Urban housing bubbles are what is keeping things afloat. The rest of Canada is a dead horse. Canadians are only wealthy because they can sell their shitboxes in urban centers. Go to the country and see how rich people are? Wages have done nothing and investment is being choked off due to restrictive monopolies and insane tax and spend leftwing policies that are currently working their way through the system (Ontario Alberta) or are yet to come (BC). Give it five years and some real rate adjustments and see where Canada is headed. 

CNONC's picture

Some folks don't like stats, facts and figures. 

Kayman's picture

"Chinese involvement in Canadian RE is next to nil."

Chinese purchase of real estate is done by direct (their personal name on the contract), and indirect (thru a corporate mask), and thru nominees (other relatives).  It is endless.

Visit Vancouver. English is rarely spoken.

And don't cite "foreign reserves" flows which are irrelevant.