"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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peopledontwanttruth's picture

Chinada the new North American country.

TheSilentMajority's picture

Chinadastan needs QE eh.

abgary1's picture

Foriegn money laundering via real estate will probably continue at more a moderate rate and the asault on the oil industry, which is one of the few legit wealth creators in Canada, will also continue.

The biggest threat to Canada's economy is the federal and provincial governments' green policies and Justin Trudeau.

The Real Tony's picture

The Canadian government is getting better at thwarting the sinister Chinese plans to completely buy up all of Canada's real estate and push every native Canadian (if there are any) out of Canada.

Cordeezy's picture

I hear a bunch of Americans are going over there!

 

www.escapeamazon.com

 

The Real Tony's picture

Canada welcomes native Americans and foreigners from countries like Germany, Switzerland, Iceland, Ireland and Scotland we don't welcome third world garbage. Unfortunately almost everything that ends up in Canada nowadays is from the third world.

VZ58's picture

We don't welcome people from these countries anymore because we give preference to "refugees". 

amadeus39's picture

"Refugees" the US created by bombing and killing in various ways many of their countrymen and families and totally destroying their cities and villiages. Accept our apologies, but please don't send them here.

 

 

 

OliverAnd's picture

The reason why the Canadian government brings in so many immigrants is because approximately 150 000 European descent Canadians leave for Europe, USA, Australia and other nations around the world.  Soon Canada will be known as Chin-stan-ia; Chinese, Pakistan and Indian salad bowl.

Déjà view's picture

In 1960, Canadian immigrants comprised about 10 percent of the total U.S. foreign-born population. Since then, immigration inflow patterns in the United States have changed even as the foreign-born population from Canada has remained remarkably steady, and as of 2012, about 800,000 Canadians accounted for 2 percent of the nation’s 40.8 million immigrants.

The vast majority of Canadian migrants settle in the United States, with others settling primarily in the United Kingdom (94,000), Australia (47,000), and Italy (27,000), according to mid-2013 estimates by the United Nations Population Division. Click here to view an interactive map showing where migrants from Canada and other countries have settled worldwide.

http://www.migrationpolicy.org/article/canadian-immigrants-united-states

Many Europeans used Canada as a stepping stone until their U.S. visa priority numbers came due...

SantaClaws's picture

You know you're in serious trouble when your charts, by comparison, make the U.S. economy look good.

CoCosAB's picture

The US reduction of "Household debt to income" is due (major part) to the reduction of household income!

Stormtrooper's picture

There you go with numerators and denominators and Common Core math again.  You get a prize for showing up.

CoCosAB's picture

So sorry for the reality check! Next time I'll just right

 

EVERYTHING IS FUCKING AWESOME!

 

And end it with:

 

Go indebt yourself to the ?

Too-Big-to-Bail's picture

I think the US deleveraging relative to Canada has more to do with record levels of default/foreclosures in essence giving the banks the big middle finger (which the US govrnment paid them back anyway, so no worries there)

Nobodys Home's picture

Tro da baby down da stairs. A cookie.

Horse Pizzle's picture

...and Canada won't be selling trees to Americans.

silverer's picture

They're down to maple syrup.

marathonman's picture

You know there was a news article a few years ago about the maple syrup cartel in Canada.  Seemed someone was draining syrup and refilling with water.  Maple syrup cartel....  WTF eh?

FoggyWorld's picture

And I wonder if those in the timber business are counted as part of the 7% of the entire population being involved in consttruction.   Seems out of whack.

Stormtrooper's picture

Does Canada have 1/3 of their potential labor force "not in the labor force" like the US?  If not, they'll be fine.  I'm sure that they have many openings for coffee baristas available in Canada to take the place of construction jobs.

pitz's picture

Yeah basically.  Most of the 'jobs' in Canada are for bum wipers and baristas.  Quality is extremely poor.  2/3rds of Canada's engineering workforce is unemployed or underemployed. 

Stormtrooper's picture

We're well on our way to seeing that level of engineering unemployed in the USSofA.

CNONC's picture

That is because the vast majority of trained egineers are not competent enough to actually perform engineering tasks.  Most end up as salesmen.  And they do that pootly.

VZ58's picture

That is because no right minded business person would invest in this country under the current political regimes voted in by the moronic masses.

Deathrips's picture

Wait a minute..theres people in canada that dont work for the government?

Simple math shows if they want to hire eachother they would save 50% by not hiring the government.

 

Im assuming they dont have that option.

 

RIPS

King of Ruperts Land's picture

1/2 of those 2/3 unemployed Engineers (1/3) of Canadian engineers are working on advanced weapons for a decapitation strike on their faggot ISIS government.

OliverAnd's picture

Among the G7, Canada takes the title for "its not what you know, but who you know".  

ShakenNotStirred's picture

There are two million unemployed in Canada.

The rest is busy with the gay parade and weed smoking.

 

silverer's picture

I have a great idea. The Canadian government should sell all its physical gold. Oh wait...

King of Ruperts Land's picture

The gold in Canada is all held by the plantation owners. The so called "government of canada" is just the slave agent for the owners.

chickadee's picture

OMG As if a 25 basis point hike is going to crash the economy.

peopledontwanttruth's picture

I agree with your thoughts but one day it will come down to this.
Ask Mr Creosote, it's only wafer thin.

https://youtu.be/MndkOApdpKs

Herdee's picture

Withdraw your Canadian home equity and buy your rich kid a gold fidget spinner:

https://schiffgold.com/fun-on-friday/fun-friday-russian-jeweler-offers-g...

ArtinCoins's picture

Shoo.  We've got Trudeau up here on the job to fix this at risk economy.  Case in point, on the down low, he just gave a convicted Guatanamo terrorist/murderer $10 million for Canada's "abandonment" while serving time in Cuba.  Imagine the leveraging up this guy can do on free money.  Sure it will spark a massive recovery in the Canadian economy in very short order.  Long diesel fuel, fertilizer, ball bearings and pressure cookers.  /wicked sarc   Art in Coins

logicalman's picture

He lobbed a grenade at someone attacking him.

Self-defence, I think it's called.

Sleep deprivation to 'encourage' a confession.

Kangaroo court.

I don't think that fits the description of 'convicted' in any real sense.

 

VZ58's picture

Yup, that confirms it. You are a retard. 

logicalman's picture

Very carefully thought out response.

You put your point so eloquently and with such insightful thought and a wealth of carefully researched information, how could I possibly argue.

 

robertocarlos's picture

The joke is on Khadr. With 10.5 million dollars he'll be lucky to afford a 400 sq ft condo in Toronto.

Savvy's picture

comment from the Deutsche Bank article

looks like the Deutsche Bank derivatives traders have placed their negative bets on the CDN real estate market for the year and now have "chart" to prove it! remember folks this is one of the same banks who were selling off their positions to their buying customers before the last collapse. they will say anything to support their position.

 

You ZH Yonks are so damn happy to have a chance to sneer at Canada. Sheesh.
Not to mention that it was written Jan 2015.

U4 eee aaa's picture

Hey man, I'm Canadian and even I'm sneering at us. Nothing more annoying than a smug Canadian. And we are (and maybe soon to be were) full of them.

At least all these debt slaves are putting a price ceiling on all the retail goods out here. For those of us free from debt, it saves us a bundle when we go out and buy necessities(assuming we are not being ultra frugal)

I can't believe this. It only took about a decade for ultra frugality to pay off :)

Deathrips's picture

^^^ This.

 

Thank you.

 

I have no beef with canada..i have beef with smug. Its like watching a spoiled brat child play with a live powerline.

In my experience i deal with the smug and their response is you hate canada. No i dont. I hate SMUG@@@@ YOU motherfucker.

Painful.

Lifes hard, its even harder if youre smug.

 

RIPS

 

 

Herdee's picture

Cheap money in Canada to keep the fake scam going:

https://www.ratehub.ca/mortgage-rates-calgary

U4 eee aaa's picture

And since I don't have any debt myself that debt number is probably 20 points higher

Anderson Coopers Gerbil's picture

The new bail in laws will help thanks Justin

Savvy's picture

Those laws were written into the 2015 budget. Thank Harper. JT is just a different face of the same god damn loonie.

The Real Tony's picture

Higher interest rates keeps the total lunatics that want to pay 3 to 4 times what a house is worth out of the housing market. That to me is a good thing because we the taxpayers of Canada back all the foreclosures.

Robert Trip's picture

Yeah.

Let's shit on the Canadians with their free health care, fair tax system and good gun control where everyone is armed but they just don't seem to kill each other.

Fuck off loser Yankees, with your soap opera politics and Jews having everyone of you by the balls and short hairs.

Bay of Pigs's picture

Free healthcare and fair taxes?

You are fucking insane.