Is Canada Really "In Serious Trouble": Goldman Responds

One week after we channeled Deutsche Bank's Torsten Slok, who two years ago warned that "Canada is in serious trouble", a warning which was especially resonant after last week's rate hike by the Bank of Canada - the first since 2010 -  which we argued threatens to burst Canada's gargantuan housing bubble...

... resulting in dramatic negative consequences for Canada's construction-heavy economy...

... Goldman has released a report titled "Does Canada 2017 = US 2007?" seeking to answer whether Canada's economy is indeed on the verge of a housing bubble burst and which - considering it was the most read piece on GS360 this morning - touches on a question many investors the seeking the answers, especially after the IMF echoed our concerns last Thursday, when it issued a report in which it warned about the "danger of a sharp correction in the housing market."

By way of background, Goldman notes the following:

"nominal home prices in Canada have grown by 13% over the past year, and by 200% since 2000. These sharp increases in home prices in Canada have invited comparisons with the US housing market in the period leading up to the Global Financial Crisis (Exhibit 1). A large downturn in the Canadian housing market in 2017 would seem particularly untimely given the likelihood of rising mortgage rates in Canada. Most Canadian mortgages have 25-year amortization schedules but 5-year terms, and so borrowers typically have to re-qualify for new mortgages every 5 years. Under our rates view, many Canadian mortgage borrowers may be forced in the coming years to refinance their loans at higher mortgage rates.

To frame Goldman's take, the bank's housing strategist Marty Young writes that "given the potential risks that a housing downturn could pose to the Canadian economy, we address here the questions (1) “is Canada’s housing market in 2017 comparable to the US’s in 2007?”, and (2) “will rising interest rates lead to significant payment shocks and mortgage defaults among Canadian homeowners?”.

Young's answer to the first question is as follows:

Our answer is “in some respects, Canada in 2017 and US in 2007 are similar, but in many respects they are not”. One important difference is with respect to the mortgage lending standards prevailing in the two times and places. Exhibit 2 charts an indicator of US lending standards vs. the US house price index, showing that standards were still loosening during 2005-2007 even as house prices were approaching a peak. In 2006, over 40% of US mortgages were funded via the non-agency RMBS market, where no-doc and low-doc lending and usage of “exotic” loan products such as negatively amortizing adjustable rate mortgages  were most common.



By comparison, Canadian banking regulators have generally tightened lending standards since the financial crisis, including reducing maximum LTV ratios and amortization terms, and, more recently, Vancouver and Toronto have introduced foreign buyer taxes to dampen house price growth... Canada’s mortgage delinquency rates have remained structurally lower than the delinquency rates in the US for the past several decades (Exhibit 3). These lower delinquency rates reflect a combination of more conservative underwriting and more lender-friendly mortgage foreclosure laws in Canada. The lower baseline mortgage default rates in Canada, combined with stronger bank capitalization, suggest that a house price decline in Canada of the magnitude experienced in the US during 2007-2011 would likely pose smaller systemic risks than were realised in the US during the financial crisis period.

Another argument from Goldman: household mortgage debt service ratios remain low.

Exhibit 3 shows that delinquency rates in the US had already started trending up by 2007, whereas delinquency rates in Canada remain low, suggesting that Canada’s mortgage market is at least not yet at the same distressed stage as the US’s was in 2007. Similarly, Exhibit 4 shows that the mortgage debt service ratio in US was historically elevated by 2007, whereas the comparable ratio in Canada remains near historically normal levels. Rental vacancy rates and unsold housing inventories are among the other indicators that were already showing stress in the US by 2007, but which still appear healthy in Canada as of 2017.


To this, however, once can simply respond that while mortgage debt service ratios remain low, simply due to sticky low rates, total Canadian household debt service is substantially higher than in the US:

Putting the above together, Goldman says that while a Canadian housing bubble burst would be bad, it would not be quite as bad as what happened in the US a decade ago.

As for the second question, will rising rates leads to payment shocks and a spike in mortgage defaults, here Goldman is less sanguine, even if it contends that the outcome would not be "disastrous":

Whereas backward-looking indicators of the Canada housing market may still appear relatively benign, market observers have expressed concern that rising interest rates will lead to significant stress, since most Canadian mortgages have only 5-year terms and thus will need to be refinanced at higher rates. Our calculations suggest that this risk, while non-negligible, may not be disastrous. As an example, a borrower who took out a 25-year amortization, 5-year term, 4% mortgage for $300K in 2013 would have been paying a monthly principal plus interest payment of $1,584. If this borrower is forced to refinance the remaining $262K balance in 2018 at a higher 6% rate – a fairly extreme scenario – and takes another 25-year amortization loan, the monthly payment would increase to $1,688, just a 7% increase relative to the original loan payment.


The payment increase is relatively modest because (a) the rising interest rate leads to a higher interest payment but also to a smaller monthly principal payment; and (b) the original 2013 loan was scheduled to fully amortize by 2038, but the new 2018 mortgage is not scheduled to pay down until 2043. By extending the final amortization date, the payment shock is partly mitigated. We thus do not expect a large pickup in mortgage defaults due to higher payment burdens among existing borrowers.

So while the modest - for now - rate increase won't lead to a payment "shock", and induce a surge of defaults among existing borrowers, Goldman admits that "higher rates can negatively affect housing affordability for future potential homebuyers" adding that "our previous research in the US and other international housing markets has suggested that if higher rates are associated with a strengthening economy or stronger inflation, then the overall impact on house prices can be limited, but if higher rates are driven by an adverse policy shock, the impact may be more negative."

Considering that Canadian hourly wages have plunged in recent months, it is difficult to make the case that the BOC's rate hike was warranted, and may indeed by interpreted as an "adverse policy shock"

Goldman tries to spin the reality, suggesting that "In the case of Canada, we expect rising rates to be correlated with a stronger labor market, and thus expect the negative impact on housing affordability to be real but manageable." That said, this "stronger labor market", at least in the form of rising wages, has yet to emerge.

Goldman's summary:

The recent rapid rise in house prices in Canada presents a risk of eventual over-heating. A model of bust risk that accounts for house price-to-rent ratios, past changes in real house prices, investment-to-GDP ratios, real GDP growth and inflation puts the probability of a 5% or larger downturn in real house prices over the next 5-8 quarters at around 30%. At the same time, we see significant differences between the US housing market in 2007 and the Canadian market in 2017, and for this reason we think it may be early to look for a downturn in Canadian house prices of close to the magnitude seen in the US before the financial crisis.

It was not immediately clear if it is "early to look for a downturn" because of Goldman's infamous, chronic sellside overoptimism about, well, everything (recall the bank had initially forecast US GDP would grow just shy of 3% by the end of 2018, and now a 2% print appears optimistic), or because Goldman needs some more time to put on Canadian housing shorts for its prop group and its best clients.


mpnut GunnerySgtHartman Wed, 07/19/2017 - 11:54 Permalink

This article basically just says that Goldman thinks that there is more room to maximize the pain.  "Yes its like 2007 in the USA, but no because I think there is a bit more room to move and squeeze as much as one can possibly get before the music stops"  I have been warning friends for years about this bubble and they laugh at me now.  I got no problem standing outside looking in because when this bubble burst, they will have no backup plan.  One went as far as to say "When the tide turns, there will be lots of opportunity since it becomes a buyers market"..  

In reply to by GunnerySgtHartman

CPL mpnut Wed, 07/19/2017 - 13:28 Permalink

That's why there is now open season declared on the Diamond family.  We're not just going after Jamie btw, all Diamonds are getting ground to dust in the crusher.  Better to burn down the whole family tree to make the example clear to the next bunch what failure costs because they ain't in Kanasa and this ain't OZ.  They walked into the wrong house to be be playing games.  Celts have always been known to be a little blood thirsty, it's why in those dumb jew books it's pretty clear that you never come if we don't say come.And those asswipes came.  Their dumb kin will be made example of for the insult of no payment and stupidity that's made us work to clean up after their sorry asses.  Their bodies will never be found during corn season neither.  Corn is a hungry plant and loves animal protein.  Eventually they'll have purpose after their kin is processed, they'll be turned into sour mash and moonshine.  We'll drink their minerals out of a jar enjoying their vitality and energy of their past lives.  They will learn to never fuck with builders or masons or Celts ever again.On August 28th 2016 they will be part of the blood ritual, they'll be the feast of the harvest. 

In reply to by mpnut

CPL GunnerySgtHartman Wed, 07/19/2017 - 13:16 Permalink

Nope, it's okay though. Most people can't afford buying a home and don't own stocks in anything so if it blows up, nothing really changes at all with all those 'businesses' gone.  Ain't my friend, ain't your friend, ain't no ones friend.  Even the RRSP scheme to freeze assets doesn't work btw, nor does it's severely retarded cousin the 401k.  Most sensible people are cash and carry, save and invest properly.  Considering it's the government telling people how to save money should have raised everyone's red flags immediately.  When those people are hosed, ain't no one to blame but themselves for the mathmatical wipeout coming. (Hang ten baby, Surf's up!) Anyone ever read the entire contract on a 401k, it literally states in black and white the money ain't yours anymore and they can do whatever the fuck they want with it.  RRSP's aren't much better and have been managed worse than the 401k's but the legalsee on them is tighter.  401k's are just throwing money away in a big black hole to never return, just like they were designed to be.  Otherwise come chant the mantra with me to change the world until the next bunch of meat shows up to get skull fucked.

Die Janet Yellen, die.Die Lael Brainard, die.Die Gary Cohen, die.Die Jamie Diamond, die.Die Mario Draghi, die.Leave them swinging until they rot on the rope.


In reply to by GunnerySgtHartman

Albertarocks Arrest Hillary Wed, 07/19/2017 - 11:20 Permalink

It doesn't work that way unfortunately.  I live in Alberta where 90% of all oil in Canada comes from, and I've had to pay the some of the highest prices for gasoline at the pump in the country for most of my life.  We pay way, way more for gas than Americans do and the oil is pumped out of the ground right in our own back yard.  I mean there's a pump-jack every few miles... everywhere in Alberta.  Where is the fairness in that?  In my opinion gasoline should be free in Alberta like the beer is.

In reply to by Arrest Hillary

umdesch4 Albertarocks Wed, 07/19/2017 - 11:29 Permalink

Whaaaat?!?!? Do you have *any* idea how much gas has cost in BC over the last 30 years or so that I've been paying attention? It's always, every day, over 30% more than it is anywhere in Alberta! Sometimes a LOT more than that. Everyone I know who comes here from Edmonton or Calgary has to completely readjust their finances to account for the difference. They can't get used to it.

In reply to by Albertarocks

Albertarocks umdesch4 Wed, 07/19/2017 - 11:42 Permalink

Yes, I'm aware that BC always pays higher.  That's why I said "some of the" highest prices.  By my experience it is about 10% higher in BC.  But you're also paying PST in BC while Albertans don't, and that's not Alberta's fault.  That makes up, what is it 7%, right there? I'm making a point here... that the oil comes out of the ground 7 miles from everybody's home and we still pay hellish prices.  Gas should be free in Canada like the beer is.

In reply to by umdesch4

Sick Monkey Laowei Gweilo Wed, 07/19/2017 - 13:11 Permalink

I guess in a way that maybe indirectly true. Central banks globally try to balance currencies but that has more to do with import export or trade. Excessive RE speculation in Canada was caused by government guarantees based on deposits and low interest rates. The decision to back mortgages to the tune of a trillion and lower rates to stimulate spending is a domestic intervention. This will encourage alternative lenders to take more risk further fueling the frenzy. Once the numbers start looking good many foreign investors are attracted and this sparks a feeding frenzy. Shortages of product triggers demand and the cost starts to quickly get out of control. There is no method at this time to stabilized such a mess fundamentally out of tune with current economic growth so the government of Canada keeps raising the amount they are willing to guarantee. SaP and Moodys have calculated that the distortion is about 25-30% over value but given the hot China money trying to escape risky havens the real figure could be much higher. We are somewhat in a pickle now because Canada's economy is heavily invested in service industries tied to housing. When governments start to guarantee mortgages there is a snowball effect in motion that only higher interest rates can control but so far I haven't seen any country wanting to be the first. There is no real solution for this. It has to crash so if you can still sell directing to a safer haven now is a good time. It's going to be very messy and the tax payer is going to be on the hook for a long time.   

In reply to by Laowei Gweilo

Justin Case Arrest Hillary Wed, 07/19/2017 - 12:44 Permalink

There are no jobs all over that land. Majority of countries develop around water. California developed from the ocean inward. BC interior is barron. The prairie provinces are vastly low population being land locked.Water is the cheapest method of transporting goods and everything on earth needs water to live.China and a host of countries are moving forward with OBOR to reach the land locked across Asia. There are millions of people that live in those areas where transporting goods is too expensive and no high paying jobs that would let them afford imported goods. They buy local.Commuting in winter is also time consuming, an expence and higher risk. A co-worker travelled 120 km one way to work each day. In winter it takes an extra half hour or moar. There have been times where an accident closes the highway and he sits there for 2 hours then goes home because there are moar issues and traffic the rest of the way. He said he moved there b/c houses were cheaper. Every 3 yrs he has to buy a new car, not including fuel consumption over those 3 yrs. How much he saves is just an illusion.

In reply to by Arrest Hillary

Justin Case medium giraffe Wed, 07/19/2017 - 12:50 Permalink

I sold my house in May. Sales have slowed a bit and prices still moved 0.6% higher in June over the previous month. Those that locked in a mortgage for 10 yrs. are ok. Prices can fluctuate over the ten years, but they will still be in the green ten yrs. from now, b/c inflation is built into the system and population continues to grow.

In reply to by medium giraffe

Guderian Justin Case Wed, 07/19/2017 - 13:21 Permalink

Smart ppl lock their interest rate for 10-15 years.In that period of time you should pay off 80% (less down payment, more monthly payments).Who gives a flying fuck about the price; it's all about debt payments and residual debt after interest rates go unlocked.In 2000 you payed a third of todays prices, but interest was at 5%: same monthly payments and residual debt as today.Fucked are those, who speculate with real estate and thus leave interest rates variable: real estate volume is too high for gambling. 

In reply to by Justin Case

msamour NEOSERF Wed, 07/19/2017 - 11:13 Permalink

Lots of immigration. I have been told most of the hot money from all over the world is coming to Canada. my mother's landlord is from Africa. They came to Canada about 20 years ago and bought 3 appartment building. Not all africans are poor. Hot money coming into Canada, and the politicians are turning a blind eye. meanwhile Canadian born citizens are suffering with the culture clash imposed on us by the newly arrived immigrants. All this is shady as fuck! Not a fan of globalization...

In reply to by NEOSERF

Justin Case msamour Wed, 07/19/2017 - 13:11 Permalink

Cheap currency to subsidize exports for trade advantage also attracts people from countries with stronger currencies. Moar bang for their buck here. We need moar tax payers to cover the baby boom retirement wave. They haven't back filled the system and birth rates dropped to less than 2 per family. As cost of living goes up, the family unit shrinks.The US has trillions in unfunded liabilities.With Gov'ts putting out fake numbers on inflation and cost of living, people earn less and have little disposable income. Real costs are rising and Gov't has to spend moar due to true inftation costs, to keep things running, but they collect less in taxes b/c real wages aren't keeping up with the real inflation rate. They adjust inflation with hedonics and substitutions etc.Containers are getting smaller, but they don't look at the size, just the item. Liars figure and figures lie.ShadowStats by John Williams reveals the true rate of inflation without manipulating data.

In reply to by msamour

afronaut msamour Wed, 07/19/2017 - 15:14 Permalink

I  am beginning to see white people with some negro in tow while shopping. The family pet as it were. They stand there while their new owners pay for them at the cash register.They look like simpletons and no way that they could ever hold any kind of job. This Liberal government is orchestrating the whole thing and paying families to take these people in like adopted children. One day, like a pittbull these animals will turn on them or steal everything and be gone. I hate liberals and democrats with every fiber of my soul.

In reply to by msamour

Justin Case youngman Wed, 07/19/2017 - 13:23 Permalink

As early as 2006, top advisers to Mr. Bush dismissed warnings from people inside and outside the White House that housing prices were inflated and that a foreclosure crisis was looming. And when the economy deteriorated, Mr. Bush and his team misdiagnosed the reasons and scope of the downturn; as recently as February, for example, Mr. Bush was still calling it a “rough patch.”<----- still in it.” Mr. Snow said in an interview. “But what we forgot in the process was that it has to be done in the context of people being able to afford their house. We now realize there was a high cost.” <------ duhAn SUV in every driveway. Use the equity in yoar homes!! Yup, it was yoar Gov't telling you to bury yoar self in debt.

In reply to by youngman

Cordeezy (not verified) Wed, 07/19/2017 - 10:36 Permalink

Maybe they are buying houses and renting them out at a high rate which really wouldn't be indicated in these reports, but it could still mean Canada and the USA for that matter will be in trouble if a crash 

DeeZ_nutZ Wed, 07/19/2017 - 10:36 Permalink

overheating overshmitting....  done heard that shit a million times.  goldman is just envious that any average homosexual or terrorist residing in canada is living better than an average american shmoe.people are going to start performing fellatios pretty damn soon during gay pride parades while their property values are going up and kill american soldiers with 10 mil rewards.  fuck man, canada is a paradise for perverts, misfits and just outright pieces of shit.  shut the fuck up, goldmuhn

Sonny Brakes DeeZ_nutZ Wed, 07/19/2017 - 10:44 Permalink

I'm Canadian and I don't think you have a clue.I wouldn't trade life in Canada for life in the USA or any other country for that matter.Canadians are stuck taking orders from the Deep State just like the USA.As for soldiers getting killed, that's on the USA, not Canada. Maybe if Americans didn't tune into knucklehead sports brought to them by the US Army, then maybe they wouldn't be so inclined to join the Army.

In reply to by DeeZ_nutZ

Albertarocks DeeZ_nutZ Wed, 07/19/2017 - 11:15 Permalink

You've never been to Canada, that's the first thing that's glaringly obvious.  Just keep thinking Canada is a shithole.  The last thing we want is assholes like you moving here.  Canada is such a stunning country to live in that we just don't want the majority of the world knowing about it.  Sure, those articles you offered are disturbing as hell.  But they no different than in the USA.  All things considered, I'm happy to continue living here and putting up the good fight to throw out governments who bend over for the NWO crowd as best we can.  I'd rather do that than live in some city in the US that has more murders every month than *all of Canada* has in an entire year.  But just keep thinking Canada is a shit-hole and by all means stay where you are.

In reply to by DeeZ_nutZ

abgary1 Albertarocks Wed, 07/19/2017 - 14:07 Permalink

Alberta used to rock until Notley the commuinst was elected and decided to insulate the civil service from the reality of the economy.Alberta will rock again in 2019 when the communists are thrown out of power but servere finacial damage will have been done. Austerity is coming.Green policies are a serious threat to the Alberta and Canadian economies.Until we get responsible governments federally and provincially Canada is rapidly becoming a socialist shithole.Fuck the leftwing regressives who are economically and financially destroying Canada.

In reply to by Albertarocks

Sonny Brakes DeeZ_nutZ Wed, 07/19/2017 - 12:32 Permalink

I can't abide by men sticking their cocks in men's asses and calling it sex. So I agree with you on that point. The feminization of society might be a result of pharmaceuticals contaminating our water supply and the degenerates that inhabit Hollywood studios and those that own the media. I can't abide by the transgender movement either. What I would like is to attract one of those beautiful Brazilian ladies to join me here.

In reply to by DeeZ_nutZ

HappyDeathMetal thedespised Wed, 07/19/2017 - 12:42 Permalink

Yes our country is full of Illuminati. Its the immigration import centre for the New World Order. Almsot everyone is really, really brainwashed. I admire Americans for their patriotism and demand to have a rifle and fight for freedom. Canadians just roll over, grit their teeth, and take it up the rear as it gets worse and worse. What used to be a beautiful country of tough mother fucking tree-cutters is a bunch of emasculated 'progressives'.

In reply to by thedespised

Justin Case HappyDeathMetal Wed, 07/19/2017 - 13:44 Permalink

Queen Elizabeth II, head of state of the United Kingdom and of 31 other states and territories, is the legal owner of about 6,600 million acres of land, one sixth of the earth’s non ocean surface.She is the only person on earth who owns whole countries, and who owns countries that are not her own domestic territory.Queen’s land holding is worth a notional $33,000,000,000,000 (Thirty three trillion dollars or about £17,600,000,000,000). Her holding is based on the laws of the countries she owns and her land title is valid in all the countries she owns. Her main holdings are Canada, the 2nd largest country on earth, with 2,467 million acres, Australia, the 7th largest country on earth with 1,900 million acres, the Papua New Guinea with114 million acres, New Zealand with 66 million acres and the UK with 60 million acres.The 4th largest landowner on earth is the Federal Government of the United States, which owns about one third of the land of the USA, 760 million acres.The epicenter of illuminati is still the UK. There are 3 obelisks on planet earth. UK, US and the Vatican. That should answer the question of who is pulling the levers here.Canada is also a corporation, minus Quebec, they are still a sovereign country not a corporation. COMER organization is in the process of sueing the Bank of Canada for charging the Gov't of Canada and provincial Gov'ts interest on money borrowed from the BoC. The charter was not changed and therefore it is prohibited to charge interest on monies borrowed. There is no media coverage of the law suit, which the supreme court of Canada allowed it to proceed to the next stage.

In reply to by HappyDeathMetal