"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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Robert Trip's picture

You are fucking ignorant and ill-informed.

Any sheep in your lineage?

Burltron's picture

Preach. Love my free health care. I have three handguns as well. Still a far superior country to well, anywhere.

Collectivism Killz's picture

Sure. I live and work in Canada; the healthcare system is two tier and almost all of us have private insurance to supplement health Canada, and also have to have our dental. There are benefits to the healthcare system, as no one is left with no coverage and prexisting conditions are not discriminated against, but there are plenty of weakness, poor sanitation conditions in most clinics and long waits. Taxes here are far from fair, at 75K in income you pay almost 50% in taxes, with young people receiving few of the benefits. Minimum wage and welfare are not much different than in the US, contrary to some who try and portray Canada as a social democratic paradise.

Burltron's picture

I'm sorry you're so hard done by. With those complaints and non-truths you must be from Quebec. Poor sanitation conditions? Almost everyone has private healthcare to supplement? BS. No one is keeping you, you are free to live wherever you want.

Deathrips's picture

Like the furnace soo much Robert? Well stay in there. WE will keep the door closed for ya.

Your wish is my command.

RIPS

bluskyes's picture

A relative just got a hip replaced after working 40 years. he was told to bring his own bandages, and to make sure someone would be able to pick him up 2 days after surgery. No physio.

Mind you, London health services built a $100K+ marble staircase for their new wing - but it didn't look the way they expected, so they tore it out, and replaced it.

Teachers make $85k+ for less than 9 months work a year

 

 

logicalman's picture

Healthcare is not free, but at least it's not even close to the disaster that is the US Big Pharma money grab.

The only reasonable form of taxation is excise tax. Income tax, IMHO, can never be fair.

 

VZ58's picture

Wow. Keep drinking the Cool Aid. You are one of the truly special ones. No wonder we have the NDP and Libs in power. Your people are doing a fine job. Keep voting for retards and see where you end up when you are old. Hint: there won't be any money left for you. 

logicalman's picture

Were you born stupid, or did you have to take special lessons?

I try not to be insulting, but every now and again I make an exception.

 

squid's picture

Keep voting for retards?

Well, you could be talking about Canada or the USA.

Or Germany, Italy, UK etc...

 

Squid

peopledontwanttruth's picture

It's only an imaginary line drawn on a map that separates us and let's face it. We're all in the same boat no matter which side of the line you live on.

Shpedly's picture

Move the Chicago blacks over the border and we'll see how good your gun control goes.

King of Ruperts Land's picture

"everyone is armed but they just don't seem to kill each other." Partially true. They do kill each other but not as much and not without good reasons.

OliverAnd's picture

Or give it a generation and watch how friendly the many new immigrants are when they realize that they were brought over simply to slave away to support a few Canadian/British families...  

King of Ruperts Land's picture

Give it a rest and go put the ISIS tranny dick back in your throat where you Canucks have to legally host it.

bluskyes's picture

health care? You haven't been sick lately, eh?

gun control - means not being able to be armed anywhere in public. no rights to private property, or to defend it. God help you, if one of your rifles is stolen. Cops start talking about charging the one who got robbed.

fair tax system? Yeah, I pay every single mother to spread her legs, and push out kids, I also pay a large number from mexico. mexican mennonite "men" where I lived would have 7 kids, and stay home on perpetual 9 month mat leave, making sure to fill their wife with seed before they leave the hospital. But that's fair I guess.

I am a working white anglo, and am the last bastion of what used to make Kanada great.

squid's picture

Free?

Ok Rob, in you world it's free.

 

Squid

Robert Trip's picture

Douche Bank.

A pillar of credibility.

BurningFuld's picture

I'm thinkin' his guy was way short CND. Ouch.

CRM114's picture

No worries, Canada has always had an EhEhEh credit rating.

Batman11's picture

Join the crowd.

1990s - UK, Japan, Australia, Canada and Scandinavia real estate busts.

2008 is just another real estate bust, leveraged up and transmitted internationally by complex financial instruments. As the global bust hits the Euro-zone, it crumbles.

Irish, Greek and Spanish real estate crashes.

Australia, Canada and Scandinavia are queuing up for their second real estate bust.

Canada has done it twice, that is just silly.

Neoclassical economics doesn't look at private debt in the economy and economies keep blowing up through private debt.

 

Burltron's picture

Stop beating a dead horse.

Meyer Bauer's picture

My friend, this article is pure "shit rope" climbing Bubs. Canada is in good if not great shape. I don't believe this Deutsche Bank made up story anymore than I believe the USSA stands for peace and democracy. I'm a little worried about shit ropes though.

King of Ruperts Land's picture

Back in the day it was 1 oz gold = $20 Canadian. But now its made up money and the people are slaves so its all made up shi9t. Need to scare the slaves fine, but don't take it to seriously.

Jim Shoesesta's picture

Two years later and if you were shorting against it on this same advice you are a ahitload.  Morons giving moronic advice to sell even more  moronic information.  It's a moronapalousa. 

Grandad Grumps's picture

"May" is not "is" ... unless the definition of what is, is, is "may".

foodstampbarry's picture

Why Ontario is not Greece is beyond me.

VZ58's picture

Give it a bit of time. Ocean tankers have lot's of momentum and take a long time to change direction. This one is on course to hit the rocks soon once the money becomes tight, because there is nothing below the waterline to keep it afloat other than printing money and raising taxes on government workers. 

just the tip's picture

greece can not print their own money.   yeah, ok, no one "prints" anymore.  you got me.

ontario, via canada, can.

OliverAnd's picture

Wishful thinking...   wouldn't it be nice to have Greece's weather and scenery?  For everything else Ontario is like Greece and in some cases worse because propaganda and corruption is an art in Ontario and as such many fail to notice.

squid's picture

It is....

But by the same token, so is every western nation.

 

One day, the bond holders the world over will wake up in a cold sweat and hit sell.

 

When?

Who knows, but tulip day ALWAYS comes.

 

Squid

Dragon HAwk's picture

If they can survive paying  $50.00 bucks for a case of beer they can Survive Anything.

Shpedly's picture

Paid 65 bucks a case for hot Budweiser in Turks and caicos. Needless to say I'm never leaving the US again.

Meyer Bauer's picture

You, my friend, are the consumate stupid USSA tourist. Yes, you can have piss European made Bud in the beloved USSA for $ 4.53 per 6 pack. You do realize that Anheuser-Busch is owned by Anheuser-Busch InBev, headquartered in Leuven, Belgium?

You come to a nigro, completely corrupt, british-assisted second world territory and complain? How fucking stupid are and the 2 million moronic USA tourists who visit there?

You get nothing you fool. Stay in the USSA till the US army blows your head off dimwit.

Abbie Normal's picture

News Flash -- Big Macs are cheaper in the USSA too; so just stay home

Pernicious Gold Phallusy's picture

You drink rum in the Caribbean.

pine_marten's picture

Just wait until they figure out a way to tax fucking.

Soph's picture

Nothing to see here, move along.

The Canadian government quietly bailed out CMHC in '08/'09 during the last crisis for 150 billion. Proportionately a shit ton more than TARP. Canadian tax payers covered it, and it prevented any correction occurring in the housing market.

The government will double, triple, and quadruple down as needed again when this bubble looks like it will burst. The government has the model now and knows what to do if the housing bubble starts to deflate too fast. The Canadian sheeple will be happy to cover the cost, because losing their housing ATM means loosing their livelihood.

This will go on indefinitely, at least until the C$ gets to 0...which is a while off yet.

Nothing to see here, move along.

Righttoarmbears's picture

Something that may have helped push up house prices in Canada above any realistic norm is the same things that has done a similar thing in London and most other major urban conurbations throughout the developed world and it goes like this, Mr J is one of the early arrivals from the Donkey Raping shit eating peoples republic of cockmedistan (DRSEPRC), he buys a dilapidated house in the cheapest area possible, then many of his brothers and sisters join him from DRSEPRC, cant speak the language but he takes them under his wing and offers them cheap accommodation, even offers to help them get housing benefit, plus can get some cash in hand work for them as well, they tell their friends in DRSEPRC about Mr J. soon when he has that house full at 3-5 to a room he needs another one, and because he can rent them as houses of multiple occupancy he can afford to pay much more for a house than Joe public, the only people he may be bidding against are smiler folk so the sky's the limit, plus Mr J knows someone from DRSEPRC who now works in a mortgage brokers who can arrange a SPECIAL deal for him. when he may have up to 20 people living in a 3 bed semi each paying around £80pwk,= £6400pm, apparently the Romanians are even hot bedding for £70-80 a week each so you can get around 30 lots of income from one house, and certainly there are thousands of folk like that in Canada with a easy to play benefits system?

Anon2017's picture

The Chinese money launderers live in some of Toronto's best neighborhoods. But you have probably never been to Toronto. 

Righttoarmbears's picture

No I haven't, but would imagine that unless they have some very specific laws to stop this type of HMO they will make up a greater percentage of the house purchases that you think, in some places these slum landlords have a portfolio of hundreds of homes, not just one or two. got back from 3 months in Auz and NZ and they have very similar problems with both the Chinese buyers and the slum landlords.

south40_dreams's picture

How's that multiculturalism thing working out for you ballet dancers?

dexter_morgan's picture

No worries. The got dat Tradeau guy up dere. He's a feminist, just like his pops......he'll fix it up.

fuzh007's picture

fuck you will be saying the same ole fucking shit on 07-12-2018

coast1's picture

Dont put canada down, they are nothng more than one of the 57 states of America...Some think Obama was stupid for sayng 57 states, but he was not stupid at all, except for letting the truth slip out.

King of Ruperts Land's picture

Canada is a failed state. It will most likely be the new stronghold of ISIS in two years with ghettos where extreme faggotry is tolerated.