"Canada Is In Serious Trouble" Again, And This Time It's For Real

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...

Comments

philipat Bigly Wed, 07/12/2017 - 21:46 Permalink

Yeah, I just got back from Sydney and the situation is remarkably like the US. In the media and from their politicians all you hear is how great everything is, the economy is booming and other miscellaneous MOPE and propoganda. When you talk to the Middle and higher classes, all they want to talk about is how much their propoerty is worth (poor lifestyle due to very high prices of everthying even - from my perspective as a visitor - with a weaker AUD and  largely living on credit)... but paper millionaires. When you talk to ordinary Ozzies they are struggling to survive because of high rent or leveraged mortgage costs on interest-only mortgages and falling real disposable income. Sound familiiar?Of course, Australia also even more than Canada, has the additional problem of having over-relied on exports of commodities to China for "growth".This can't end well....anywhere.PS. Beautiful City

In reply to by Bigly

Killdo Bigly Wed, 07/12/2017 - 23:11 Permalink

their houseing is much cheaper than in the US and they build much better quality buildings there - great architecture etc - no tlike cheap-shit Canadian condos (or even worse American ones - the new buildings in SF look as if they pinched every penny they could). I've seen places in Melbourne in great new buildings for about 400k about a year ago

In reply to by Bigly

Tugg McFancy Killdo Thu, 07/13/2017 - 08:11 Permalink

no tlike cheap-shit Canadian condos (or even worse American onesLOL you don't know what you're talking about, the Australian dogshit apartment buildings are full of faults, the builders don't give two shits, fire hazard cladding like in london, they've recently had to close off some areas underneath because of exploding glass balconies and there has been consistent reports of internal leaks, one building was so bad when it rained outside the walls insider literally weaped. So no, they don't build quality buildings in Australia. They build the same dog shit towers they build everywhere else.

In reply to by Killdo

Déjà view Whalley World Wed, 07/12/2017 - 22:28 Permalink

COUNTRY COMPARISON :: CURRENT ACCOUNT BALANCE
4/5 EYES RANK LAST...

196 AUSTRALIA -$33,200,000,000 2016 EST.
197 CANADA -$51,080,000,000 2016 EST.
198 UNITED KINGDOM -$114,500,000,000 2016 EST.
199 UNITED STATES -$481,200,000,000 2016 EST.

https://www.cia.gov/library/publications/the-world-factbook/rankorder/2…

All have in common...Chicom RE new Swiss bank account

In reply to by Whalley World

GUS100CORRINA NoDebt Wed, 07/12/2017 - 18:24 Permalink

"Canada Is In Serious Trouble" Again, And This Time It's For RealMy response: It is not just Canada, but the entire WESTERN CULTURE including all the corresponding economies.WE ARE OVER LEVERAGED, OVER BUILT, OVER WEIGHT and OVER DRUGGED. What else can one say except the day of reckoning can't be far off.

In reply to by NoDebt

general ambivalent asteroids Wed, 07/12/2017 - 18:15 Permalink

Well, if we are honest with each other it is hard to look at the majority of men today and say that they are real men. Are lumbersexuals more manly than metrosexuals? They aesthetically look like real men from the past, but they generally do not have the vital characters suggestive of real men.And can we not say the same of women? Are 'women' who work, approach sex in the same way as men, and never consider kids until they are past it real women? Hell, it is now widely known that the pill, that great liberator of women (wimmin?), actually causes them to enter a menopausal state.So yes, there is something very wrong with applying traditional gender roles today. It's just that the people who have taken on the idea of gender roles want to corrupt them further and add to the degeneracy rather than try to figure out what the hell went wrong and try to fix it.We also know that medication, or some other pollutants, in the water is causing fish to have both reproductive organs. So if the fish are trannies what's to say that something in the modern food and water system isn't messing with human sexual biochemistry? All the cocktails given to farm animals to prevent disease are passed on to us, and all of the genetically modified trash has uncertain effects on the human body. I'm no expert, but I'd have to guess that if a growing body has to spend a lot of time repairing the gut then sexual functions may not develop correctly or fully.

In reply to by asteroids

logicalman spaniel Wed, 07/12/2017 - 16:48 Permalink

It should have come from US, as it was US that attacked Afghanistan illegally.All the guys on ZH who say they are prepared to defend themselves would, if they are not bullshitting, have done the same as he did. He was after all being attacked by illegal invaders and was defending himself.The soldier's widow should also be going after US government for sending her husband to an illegal war, not after Khadr's money.I would think most people would want to be paid more than $1,000,000 a year to spend time in Guantanamo under the conditions prevailing there. 

In reply to by spaniel

Kayman logicalman Wed, 07/12/2017 - 20:45 Permalink

illogical manNeither Omar Khadr, nor his father ofr mother were Afghani, so go get a brain in thy getting. The parents were of Palestinian and Egyptian descent. Therefore he was not defending himself nor his country.  And Canada choose to attack Afghanistan, and many Canadian soldiers were killed.  None of which received $10.5 million dollars for risking their lives. Omar Khadr went with his father to kill Western soldiers including Canadian. But this stupid Canadian decision has certainly cleared up one thing.  Any Canadian adversary captured fighting on foreign soil will be summarily executed.  Nobody is going to put up with allowing the likes of Omar Khadr and his father to survive and then be rewarded.Canada just bent their head(s) all the way back between the old butt cheeks and kissed their ass(es) good-bye.

In reply to by logicalman

logicalman Kayman Wed, 07/12/2017 - 21:02 Permalink

It was the attacker that died.US and Canadian soldiers weren't defending their countries, they were attacking another based on lies.Seems about right.Look at all the heroine they are protecting in Afghanistan.Canadian soldiers signed up based on government lies that anyone with an ounce of sense would see right through.Canada didn't choose to attack, Canadian arsehole politicians in the pockets of US did.Get a grip and at least try to figure out why there's so much war.Here's a big clue - MONEY FOR THE ELITES that grunts and their innocent victims pay for with their lives.This should give you a bit of a clue, hopefully....“Military men are just dumb, stupid animals to be used as pawns in foreign policy.”Henry Kissinger.Ask yourself who benefits most from the aforementioned 'foreign policy'  

In reply to by Kayman

Kayman logicalman Thu, 07/13/2017 - 10:04 Permalink

Nice diversion.  I don't support the heroin trade nor the growth of militarism.  The military adventures are appalling.  But in this specific case of the Afghanistan invasion, including the Canadian government's full participation therein, they were after Bin Laden. Omar Khadr's parents were the people that put their son into a foreign war where Khadr was actively fighting against Canada- the country that, after the Khadrs lost the battle, their son now claims to be a full-fledged citizen thereof.  Naturally, if the Khadrs had won their battle and killed many soldiers, including Canadians, they would have renounced Canada.  Like the Khadr mother.

In reply to by logicalman

Justin Case spaniel Wed, 07/12/2017 - 20:00 Permalink

Since 2002, 779, including at least 15 children, have been imprisoned at Guantánamo. The vast majority of them were sold to the US when the military was offering large bounties for capture of terrorism suspects – typically, around $5,000 for each man. So far just 9 detainees have been convicted of a crime – the same number of men who have died while in detention. No one has ever been held accountable for the illegal detention and abuse at the prison camp.There was a violation of his constitutional rights and he was held without trial and tortured.

In reply to by spaniel

Kayman Justin Case Wed, 07/12/2017 - 20:49 Permalink

"There was a violation of his constitutional rights and he was held without trial and tortured." WTF?Afghanistan was a war where Canada was on the same side as the USA.  Omar Khadr was fighting against Canada.So WTF are you talking Consitutional rights about someone fighting against his own country on foreign soil.Your arguments are typical Canadian bullshit.  You can't even get your Facts straight.

In reply to by Justin Case

Justin Case Kayman Wed, 07/12/2017 - 20:57 Permalink

What if Khadr was innocent of the murder of Sgt. Christopher Speer this whole time, and we didn't lift a finger while he sat in a hell-hole for a decade? For almost 15 years, Canadian treatment of the Khadr case has been dominated by the presumption of guilt. Yet the evidence tells a different story. For all the fury boiling up over news of his settlement, there's precious little insight or knowledge about the facts. As a former prosecutor, something has always troubled me about this case, and my deep unease hasn't abated with time. Any experienced trial lawyer would be troubled to open this file. With the exception of Khadr's "confession," wrung from a traumatized and severely wounded teenager under an abusive interrogation, the evidence against him was remarkably thin.

In reply to by Kayman

Justin Case Justin Case Wed, 07/12/2017 - 21:16 Permalink

What evidence exists appears confused, inconsistent or contradicted elsewhere. Photographs of the attack scene released in 2009 appear to directly conflict with the prosecution's summary of its own case. Had the events happened under Canadian jurisdiction, they would not have been enough to lay a charge, let alone secure a conviction. This case represents a Canadian tragedy and failure of moral courage on the part of our government. When Canada should have championed transparency, due process and the rule of law in the Khadr proceedings, we stood mute or actively participated in his abusive interrogation in custody. Had the Canadian government done so, any criminal trial in open court would most likely have ended in a humiliating defeat for the U.S. government, and public perception would be very different from what it is today.http://www.nationalobserver.com/2017/07/07/opinion/what-if-omar-khadr-isnt-guiltyIn woars people get hurt and killed. 

In reply to by Justin Case

Justin Case Kayman Thu, 07/13/2017 - 10:29 Permalink

Khadr was fighting against Canada and renounced any rights he had, by taking up arms against the countryThere was no trial or evidence to prove that it was actually him that threw the granade from behind the wall. There were others that were firing weapons at the attackers but were killed and Omar was buried in the rubble from a blast. So he threw the grenade and buried himself in rocks in seconds? Omar was the only one still alive. So take him and torture him and make him the bad guy, case closed.

In reply to by Kayman