"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 Canadian household had failed to reduce its debt load.

Additionally, the German economist 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 last summer, when the trends shown by Slok three years ago had 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.

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, Bloomberg recently said that:

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 not long ago,  one can make an educated assumption, and as he said it most likely will be the result of higher rates.

Which brings us to last July'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: rising rates.

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 shown in the chart below, the 10Y yield is now at the highest level it has been since the summer of 2014 and rising. Meanwhile, the yield on five-year government bonds rose to 2.18% this week, the highest in almost seven years.

Furthermore, as US homebuyers from the time period 2004-2006 remember all too vividly, there is nothing that will burst a housing - and credit - bubble faster than a spike in mortgage rates.

But while Torsten Slok's original warning that "Canada Is In Serious Trouble" in January of 2015 may have been premature, this time it appears that the threat facing Canada is all too real.

The reason: while it took banks some time to push their mortgage rates in line, they have finally "caught up" and as Bloomberg reports, Toronto-Dominion Bank has lifted its posted rate for five-year fixed mortgages by 45 bps to 5.59% as government bond yields touched their highest levels since 2011 this week.

"It’s a big move, the biggest move in years," said Rob McLister, founder of RateSpy.com, a mortgage comparison website.

"There’s a lot of reasons why that could be -- maybe they’re taking a position on rates going forward, which is not that typical; maybe they’re trying to get people to lock in and generate better spreads."

Contacted by Bloomberg, Toronto-Dominion, Canada’s second-largest lender, said it lifted its five-year closed rate on Wednesday, along with increases to its two-year, three-year, six-year and seven-year mortgage rates.

In short: it hiked rates on everything. Why would a bank do that? Because i) it needs to, in order to remain profitable on its Net Interest Margin as the BOC keeps hiking rates and ii) because it anticipates greater losses in the very near future.

Meanwhile, Canada’s housing market has already set off on a wild ride. Recently, Toronto home prices dropped sharply from last year’s dramatic spike, while prices in Vancouver have rebounded, although here too they remain on edge amid a collapse in volulmes as much of the Chinese demand has vaporized, however a lack of selling pressure has prevented an all out rout. For now. 

As for Toronto Dominion, and its decision to implement "the biggest move in years", the bank explained that "adjusting our rates is not a decision we take lightly," and added that "we look at a number of factors when determining rates including the competitive landscape, the cost of lending and managing risk."

Even with the change, rates “remain competitive and at historically low levels," the bank said.

Toronto-Dominion’s posted rate is now higher than rivals including Royal Bank of Canada, Bank of Nova Scotia and  Bank of Montreal, which each advertise posted rates of 5.14 percent. Canadian Imperial Bank of Commerce has the lowest posted rate, at 4.99 percent.

So with mortgage rates now surging amid debt-service ratios which have never been higher, it's only a matter of time before Slok is finally proven right...


NugginFuts Fri, 04/27/2018 - 12:38 Permalink

In Canada they have two Seasons...six months of winter and six months of poor snowmobiling.

Soon there will be a third: tropical rainstorms filled with falling bankers.

BLOTTO east of eden Fri, 04/27/2018 - 13:02 Permalink

Not to mention us Canadians are getting fuckin duped again this time with a fake truck attack.


.no blood on truck

.how did truck stop with no shots fired and where did this maniac calmly get it from

.raw footage of cpr being performed on fake dummies is a fuckin slap in the face for those who do it right.

.emotionless people on scene

.cops can kill innocent people but when some mofo just 'kills' and runs over 25 people people AND points a gun at a cop?! - the cop doesnt shoot.

.while suspect has gun pointed at cop...cop goes into his car taking his eyes off to shut off siren?!


commmmme on mannnn

In reply to by east of eden

TheRedScourge A Sentinel Fri, 04/27/2018 - 16:18 Permalink

Debt to income ratio is useless. Not only does it combine seniors with students, but it completely neglects assets.


I would have a debt to income ratio of 300% according to that useless graph, but that's because I just bought a home. No one who just bought a home is going to have a favorable debt to income ratio unless they're rich enough to buy it cash.

In reply to by A Sentinel

TheWholeYearInn BandGap Fri, 04/27/2018 - 13:59 Permalink

Michigan is north of Wisconsin, asshole


Oh yeah, sorry, I thought this article was about Michigan. To make amends ~ I offer you a few extra scraps of free moose jerky for your time & trouble.


Alas, you know what the searches all say ~


I'd have made Whitefish Bay if I'd [only] put 15 more miles behind me.

In reply to by BandGap

Harry Lightning oddjob Fri, 04/27/2018 - 13:41 Permalink

Difference is that only a small Congressional district elected Ryan, but the Boy Blunder was elected by an entire country.

He did have a hot mother when she was young. If I am not mistaken there are some great stories of her ]antics in clubs and discos. I recall one time when Canada was all the rave over Maggie doing a beaver shoot at a club.

Which reminds me of this music video : https://www.youtube.com/watch?v=aYDfwUJzYQg

In reply to by oddjob

RabbitOne Bitchface-KILLAH Fri, 04/27/2018 - 17:23 Permalink

Living in SE Michigan I grew up going to Canada, I worked with many Canadians at Great Lakes Steel and still travel over the bridges to have a great meal. I am sorry to see their country go down hill. I have always admired  the country that gave the world ice hockey, the snow blower and Labatt beer.

My solution would be to replace Justin Trudeau, the son of the former Prime Minister Pierre Trudeau, who was swept into power, along with his Liberal Party, in a surprise win over Prime Minister Stephen Harper’s Conservative government. It is now time for Don Cherry, in his wonderful apparel,  to take the reigns in Canada as Prime Minister and tell the liberals to get the puck out of there...

In reply to by Bitchface-KILLAH

SRV Harry Lightning Fri, 04/27/2018 - 14:58 Permalink

Way too much love for the "little lady" there Harry... Mr Global's No.1 Bitch!

You have no idea how close Toronto is getting to Londonstan... except for a few years in the beautiful Caledon Hills north of TO I've lived in the metro TO area all my life (68). Finally had enough of being a decidedly Visible Minority in my home town and have moved well outside the city where I no longer feel like I'm living in ME Shithole!

You don't know how lucky you are to have Trump... if you can, visit TO and learn... to love this president!


In reply to by Harry Lightning