"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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coast1's picture

so are most states in the U.S. 

directaction's picture

It's the birthplace of modern fisting

Abbie Normal's picture

and the birthplace of Agent Zero -- who spread AIDS around the world during his time as an Air Canada flight attendant

King of Ruperts Land's picture

And the CBC will spin it like its the greatest social justice the world has ever seen.

nje's picture

uh, wow. so many ways to approach this idiotic comment.

this moron has equated ISIS values with EXTREME FAGGOT tolerance.

can someone get this idiot a copy of the Quran?

Anon2017's picture

Canada no longer has 30 year fixed rate mortgages except through the Bank of Mom and Dad. As the B of C continues to hike short term inerest rates, more potential borrowers will not qualify for a loan. When it comes time for borrowers to requalify for another 5 or 7 year loan (with a 25 year amortization schedule), some will not qualify and will be forced to sell their homes. Oh well, there are always the Chinese. Money laundering is a big business in Canada. 

personal109's picture

Exactly, the Canadians real love the Chinese and their 'bridge to nowhere' ecemony, the biggest money launderers on the planet.

the not so mighty maximiza's picture

take off you hozer lozer, time to print some loonies

King of Ruperts Land's picture

The loonie is some base metal alloy from like 1987 or so. They already had to debase it for a cheaper alloy. For a while the vending machines would not take the new ones.

Northern Lights's picture

It's a zinc-alloy I understand.  Yes, the loonie is getting lighter.  I've noticed.

nje's picture

the loonie is still more valuable than any $1 note the idiots print.

edit: our 1 and 2 coins aren't nearly as fiat.

personal109's picture

Nothing's going to happen. The Canadian central bank will continue to print money till kingdom come, the Canadian goverment will use that money to bail out anything and everything in site, everyone in the country will live in a 5-10 million dollar home and the real economy will do what it does best stagnate.

I am a Man I am Forty's picture

If anybody thinks they are going to let interest rates get out of control they are dreaming.

57-71's picture

How about some understanding of the impact of this .25bp rate increase to .75% BOC prime?

 

With of $400,000.00 mortgage, a person with a variable rate mortgage will pay less than $100.00 more a month.

Panic? Only online.

SRV's picture

rotflmfao... ya may want to research 5 or 10 mins before you dive in head first... $400,000 wouldn't buy a garage in the high density populations in Canada, so it's more like $400/mth for families already stretched to the limit.

And as for implying this is no big deal, people are walking away from signed deals all over Toronto because the prices are falling so fast entire downpayments are being wiped out before the closing date... the highest bidder blind offers are gone, and any buyers (rare) are now calling the shots and pilling on all kinds of conditions (unheard of two months ago.

This sucker's goin' down big time.

Davidduke2000's picture

The difference is Canadians can afford their debts, americans cannot.

Interest rates are up because bond buyers want more return in the us and Canada and all over the world. the money printing no longer works , this fraud is over.

directaction's picture

Every day I wake up hoping for an historic and unprecedented economic collapse. I'll get my wish soon. Please.

JuicedGamma's picture

2008/9 wasn't big enough for ya.  Luckly we got stick saved, maybe you're hoping the goalie is out to lunch this time?

Global Douche's picture

Worse yet, Canada's government has sold off basically all it's gold.

Wait a moment! Didn't Yellin tell Congress Critters today she is strongly against any Audit The Fed actions? Maybe that says more than many want to admit. 

p.s., The Buy Bitcoin sign guy.. Has he been identified? He likely needs Secret Service protection from the Dark State now.

dogballs's picture

Factoring in the drop in value of the CAD to USD, now what is the real story?

Herdee's picture

The only reason that Canada is legalizing Cannabis just like Colorado is that Canada is insolvent and bust just like the rest of the G7 countries. They need the tax money. There's this little item in Canada which most likely totals $1.5 Trillion of unfunded liabilities going forward. Same scam as the States.

Northern Lights's picture

Problem is, those Cannabis sales won't save this country.

Ink Pusher's picture

By the time they ( if they ever follow through) actually pass legislation and legalize weed in Canada the already established market will drive them into the ground in a price war.

The reality: weed won't be legal  in Canada until 2021 -2022 in a best case scenario because the federal government screwed the pooch by not making 1 law for the whole country. 

Add provincial and municipal input and respective money grabs to the mix and there you have it. The biggest bullshit boondoggle in Canadian history.

HoserF16's picture

Canadians are not exactly the sharpest tools in the shed...

nje's picture

You tried to end us in 1812. Hows your white house doing? Idiots!

Rufus Temblor's picture

Canada's in trouble because they elected a communist in Justin Trudeau.

bluskyes's picture

Justin's got a long way to go to live up to his step-father's  legacy. He F'd up the Bank of Kanada.

Now, justin's biological father - Fidel Castro, he'd be welcomed in Kanada.

nje's picture

justin still has 3 years to go as prime minister. plenty of time to fuck up just as much as his father.

bluskyes's picture

Kanada is just another failed socialist state. Look at Ontario. It's largest city is a third-world shit-hole run by sexual deviants.

MarcusAurelius's picture

As a Canuck, a market trader and Steve Keen economic fan, I was wrong about this bubble here in Canada back in 2010 when I cautioned the then central banker Carney that this house of cards would follow the US only much more severely. I was wrong in my stock market analysis back then too as the S&P climbed higher and higher as it is still doing today. I would agree that all fundamentals point to a nasty fall but one could say that about the over valued stock indexes too and yet they keep rising. One could also say that about the Chinese banking sector and a number of other blown bubbles around the world. However I stopped betting against the trend back then in 2010. The scenario more likely is the US market will follow Canada and Australia's along with the UK and a few other disconnected markets higher yet. No it doesn't make any sense at all. It never did. However I am not willing to concede that this is the top. 

The Gray Man's picture

Wait a minute... We are supposed to listen to a guy from Deutsche Bank tell us that "this time it's for real" after ZH went on and on last year about how DB was going to explode any second and permanently ruin the world's economy?

Fuck that. All we hear all day long is how the financial sky is falling and we have charts and graphs slapped on our screens showing how THIS ONE IS THE REALLY BAD ONE, and NOT ONE SINGLE BIT OF IT has had one iota of effect on 90% of the people in North America.

Someone explain this, please.

TheWrench's picture

It's Rigged. It will crash when they want it to.

Lesson concluded.

Troy Ounce's picture

Prepare for

1. War

or

2. State of Emergency in Western Work.

I bet on a RussiaBurger, a sudden nuke from the Russians (wink, wink) whereby the US must "unfortunately" retaliate.

This scenario would work perfectly with the present US Deep State narrative. 

Zepper's picture

If what ZH posted is accurate then I would have to agree with their analysis. I love seeing bad things happen to bad people... and anyone stupid enough to go into debt this much without it being a sound financial decision is a very very very bad person. These are the people that make the world crash and burn... cant afford their cars, cant afford their homes, cant afford their credit cards... but hey everything is rosie and nice.

 

BURN BABY BURN BIGTIME!

globalintelhub's picture

finally canada will be bought by the US when the market for property crashes, so we dont have to invade them www.splittingpennies.com

IronForge's picture

Coming from a Derivative Time-Bomb of a Bank, it's priceless

sinbad2's picture

The US created trillions of US dollars out of thin air, and gave it away for free. The money went to every corner of the globe, including Canada.

Now the US says we are going to pay interest on that money, if you bring it back home.

This isn't the first time this has happened, but it is by far the biggest example.

In the early 1990's the US lowered interest rates and money flowed to Asia, then the US raised interest rates and as the money flowed back to the US, the Asian economies started to crumble, and US companies were able to buy assets for cents in the dollar. The same thing happened in the early 80's.

The Fed goes fishing and uses cheap dollars as bait, then when the fish are hooked, they reel them in.

It's the same scam that has made Jews hated for thousands of years.

 

But as long as the suckers keep falling for it, why not?

TheAnswerIs42's picture

Went back to Montreal for the Jazz Festival.  Been going for over 20 years, but this was after a 10 year hiatus.

While the Jazz Festival has grown to over 2.5 million, the quality has gone down.

The good stuff, before a lot for free, is now only pay for.

Noticed a LOT of changes. A lot of new construction. More trash and panhandlers, just a lot. Very noticeable.

The ethnic neighborhoods have changed. Little Italy has shrunk. The Jean Talon Marche has lost alot of it's Italian flavor, replaced by MENA stores.

The people are still polite and friendly, just a bit more distant. You can see the sadness on the Metro.

Downtown, there are more head scarfs and halal shops.

This is much more than multicultural.

Will think twice about going back...

 

Pernicious Gold Phallusy's picture

The rainbow crowd at work says Montreal is their favorite place. You must have missed that on your trip.

Benito_Camela's picture

Same virtually everywhere. The oligarchs have been vacuuming up all the wealth, not just liquid monetary wealth, but the culture and the freedom not to participate. Plus all music fests are basically corporate bullshit now, same reasons - the corporate class has taken full ownership.

peterk's picture

canada is nothing compared to  Australia.

Ink Pusher's picture

That's why they are trading at par eh?

 

bshirley1968's picture

What a load of crap.  According to these charts bankrupt America is in great condition. ....again a load of crap.

Canada's economy is the size of what, Nebraska?   The state of Illinois is totally bankrupt, way bigger and more influential than the entire country of Canada. .....and the entire financial world obviously doesn't give a shit.

The whole frickin world is bankrupt and NOBODY IN THE FINANCIAL WORLD GIVES A SHIT!  Have you people seen the stock markets,  the bond markets, the price of gold/silver?  Hell, look at that broke down sway back bitch they call the eurozone.

These articles are such redundant bullshit.  As long as the sheeple continue to get their stupid asses up and go to work, pay their insurance and taxes, this shit show keeps a rolling.   They will print, adjust rates, change the rules, etc. to keep the music playing to suck the last oz of life out of humanity.  That's why we call them parasites.

Get a damn clue.  Canada has always been the welfare state of the British crown and then the US.  Who gives a shit if a welfare state that adds less to the world economy than they take go bankrupt.......when have they never been bankrupt?  Maybe when there weren't banks.

Ink Pusher's picture

Shorting over exposed Canadian banks has become a favorite pastime/ bloodsport  for American traders over the past decade.

I am personally amazed that these dipshits at the BoC haven't hung themselves yet. 

Additionally I find that the source of this article isn't very appealing,nor can it be considered to be

entirely credible because of the Douche Bank's current lacklustre rep.

FBaggins's picture

 

Canada’s problems pale in comparison to those of the USA.

Once the people of any nation allow an exclusive group to hold their money as their bank, simply on the basis that it is secure or safe for recovery, but at the same time cast a blind eye to the fact that the credit they create is mainly being used preferentially for the advancement of that exclusive group, then the people have lost control of their nation and of their future.  President Woodrow Wilson was an instrument of the same foreign oligarchic bankers and he betrayed the American people in 1913 by giving them control over American currency by the Federal Reserve Act. In doing so he ignored and contravened the wisdom of the founding fathers, and the later Andrew Jackson, Abraham Lincoln, James Garfield and William McKinley. The blood trail is long and deep and continues to this day for anyone with power or influence who dares to oppose the will and machinations of this foreign power.  

 

The prevailing tyranny is seen when people are afraid to challenge those in power who have betrayed their own nation by filching trillions of dollars and constantly use deception and false flags like 9/11 and sarin gas attacks to cover up their crimes and advance their interests.  

Rallydude's picture

Don't worry about it... I have been waiting since 2007 for all the bubbles to pop... but the Deep State has all the AI manipulation under full  control.   Bad news is always good news. 

GoldHermit's picture

Another brick in the wall, which is cracking badly. Soon the bricks will fall like dominos.