"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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Batman11's picture

There is nothing like watching elites when they are in the grip of an ideology, they just keep making the same mistakes over and over again.

Real estate busts:

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.

It’s getting silly, but an ideology is an ideology.

The broad brush of monetary policy keeps blowing bubbles and bursting them again.

Alan Greenspan does it after the dot.com boom and using the broad brush of monetary policy blows a housing bubble and bursts it again on tightening.

The ECB blows bubbles at the Euro-zone periphery by having the same low interest rate set across the Euro-zone at the beginning before bursting them again.

Canada has done a “Greenspan” with its housing market, lowering to blow the bubble and now tightening to burst it.

It’s getting silly, but an ideology is an ideology.

The economics rolled out for globalisation doesn’t look at private debt in the economy allowing these bubbles to blow up undetected by the technocrats.

Someone who did see 2008 coming, Steve Keen, has worked out where they might look if they wanted to nip these things in the bud, the debt-to-GDP ratio.


1929 and 2008 stick out like sore thumbs but the FED, IMF and OECD weren’t aware of any problems in 2007. Steve Keen saw it in 2005.

You can even see the sharp rise in non-productive debt in the 1980s as the S&L crisis takes hold. The FED see nothing until it blows up.

It’s getting silly, but an ideology is an ideology.

Batman11's picture

"Important among those values has been the idea there are truths that are rooted in and can be ascertained through empirical observation." Larry Summers

Empirical observation, what a good idea.

Why don't our elites try it?

Batman11's picture

"Fuck me, I hadn't noticed" Steve Poloz


Terminaldude's picture

It's all about fractional banking. The central banks need to have money brought into existence on a continual basis and how do the do that? They work to make conditions that draw regular average citizens (in all parts of the world) into debt. The more the better. Then they make conditions to steal our money. No sense saving since you don't get a return (fiat), so might as well buy something and go deeper in debt.

Central Banks are not part of our Governments are a established with one purpose and one purpose only. Steal the wealth of the working class's. the US dollar has lost about 98% of its buying power since the "Federal Reserve" came into existence. No Government would do that unless being paid off buy the banks.

Every person in the world needs to read the book, "The Creature From Jekyll Island". It's long and a bit boring in parts but completely explains the fleesing of humanity through Central Banks. One question. If a bank funds both sides of a War, who's interests are they worried about? Answer. NOT OURS, and that is the bottom line in what is wrong with the world we live in. Everything boils down to money (in all forms) and he who controls the money controls EVERYTHING.

TRump wants to Audit the Fed. Should happen but won't.

Ink Pusher's picture

The only relevant post on the page, but the mass programmed ideology seems to be imparing readership and comprehension. They'd all rather talk partisan politics and compare apples to oranges than face the reality. It's ok , my profit is grown on denial.

ludwigvmises's picture

Household debt service ratio is at 10% in the US. 14% in Canada. This is in % of disposable income. That 4% difference is massive. Canada will go down the drain once this blows up.

Crazed Smoker's picture

House prices are either A) too high or B) perception of the value of fiat currency is too high.  

venturen's picture

seems like a good time to borrow a couple trillion Canadian Dollars....government bailout and I can walk away!

expiredeternity's picture

Graphs must always start a ZERO to show the actual situation. This data has been manipulated.

Hume's picture

Canada has something that the US does not have - a massive economy on its border that it can use to export its way out of any recession.


This time i mean it!

Benito_Camela's picture