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City of Toronto - Average Price hits $500,000, Detached $734,089

2010-10-27T15:15:00.003-04:00

The average price of a property in the enlarged megacity of Toronto is now $500,807. An average detached home averages $734,089.

Despite record unsustainable deficits at all three levels of government, stubbornly high unemployment of 9.1%, poor economic performance along with a near collapse of the manufacturing sector, TREB (Toronto Real Estate Board) suggests that fundamentals remain strong.

"People are buying because home ownership remains affordable. A family earning an average income can comfortably afford a mortgage on an averaged priced resale home" said Jason Mercer, Senior Manager of Market Analysis.

Median household incomes in 2006 within the confines of the city were $51,200, below the national median of $58,300.

A 2007 report, Losing Ground: The Persistent Growth of Family Poverty in Canada's Largest City, plots median family incomes in Toronto, the GTA, Ontario and Canada.

"Since 2000, Toronto's median family income after taxes and transfers of $41,100, the midpoint for all households raising children 17 and under, has remained relatively stagnant and is now $10,000 lower than the rest of Canada and almost $20,000 less than the rest of the GTA, the report says."

According to many economists, unlike other markets, Toronto hasn't experienced a bubble. Despite a rebound this month, sales in the first two weeks of October were down 17% YOY.

Jonathan Tonge
americacanada.blogspot.com

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Growth in Consumer Credit Collapses by 50%

2010-10-23T16:45:00.010-04:00

After an unprecedented rebound in borrowing and spending in 2009, growth in consumer credit has collapsed over the summer. The current expansion level is half that seen in 09 when it was expanding at about $4 billion per month.

Consumer credit accounts for practically all household borrowing outside of residential mortgage debt. Personal debt such as credit lines, credit cards and loans make up the majority of outstanding consumer credit.

Retailers might be disappointed this Christmas after last year’s record borrowing binge that funded the holiday season. If the trend holds, we could see retail purchases drop by as much as $6 billion YOY in just the final quarter of 2010.

The next few months will be a telling time for the future of the Canadian economy. Will the wheels keep spinning as so many bulls might believe? Or will the economy begin to sputter, weighted down under record debt, falling home prices and a sudden collapse in spending as exhausted consumers refuse to borrow.

The current trend will have significant implications on GDP growth. I personally believe more downward revisions to economic forecasts are coming – so long as housing maintains its downward momentum.

The chart provided shows the 3-month moving average of nominal changes in consumer credit. Changes in outstanding credit were measured by taking the balance in one month and then subtracting the previous month. This figure was then averaged by adding in the changes recorded in the two previous months and then dividing by three. This reduces monthly volatility and helps identify trends.

Jonathan Tonge
americacanada.blogspot.com

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The 2.1 Tipping Point - REVISITED

2010-09-28T10:43:00.003-04:00

In May I published a post titled “Listings – The 2.1 Tipping Point?” in which I predicted an imminent collapse in real estate sales.

I noted that when the ratio of new listings-to-sales exceeded 2.1, history shows that it generally marks a peak in the market. After peaking, it is not until the ratio goes below 1.5 before you can be confident that the market has bottomed.

In the following month real estate sales collapsed in a manner that can only be compared to 1990. Hot markets such as Vancouver, Toronto and Calgary saw year-over-year sales plunge by roughly 40%.

Two charts are provided below. The first was originally published in that very article and displays sales and listing activity until April 2010. The second captures activity up until the end of August. Note that both of these charts are produced by CREA and that the pink annotations were made by me.

April 2010

August 2010

The ratio has proved to be an excellent leading indicator. It will be one component that I will use to help call a market bottom and give a buy signal.

Note that in the second chart, that at point f there has been a collapse in both sales and new listings.

Home owners and real estate agents may not have forgotten the mantra from late 2008: “Don’t list now, wait until spring”. While this attempt to monopolize the supply of real estate in Canada may have proved successful and worth repeating, it was the unprecedented drop in interest rates in fall of 2008 that led to the surge of real estate sales in spring of 2009. It takes approximately 6 months before the changes in the overnight rate have an impact on consumer behaviour. That rule proved to be very accurate.

Nevertheless owners are less likely to list when sale volumes are depressed. Selling your home in a down market is not easy and is especially hard on families. Those desiring to upgrade may sit and wait for prices to adjust.

Recently we’ve been told by the boards and MSM that prices are going to maintain their lofty levels despite the drop in sales thanks to sellers not listing their homes. Well the fact of the matter is that the new listing-to-sales ratio has maintained itself well above the 2 mark. It is still in very dangerous territory and giving a very strong ‘sell’ signal. We could easily see home sales take another dive in the following months as we head into winter. Alternatively we could see new listings rise.

The MSM has also been erroneously reporting that prices have held firm. Asking prices have dropped 5-10% in many long overbought markets across Canada. Properties are being delisted after 4 or 5 months with little activity.

There has been an assumption that since (based on the initial false MSM’s story) prices have held firm to this point that they won’t decline at all. After the volatility in the market in 2008-10, I can see that people have lost any resemblance of patience. US real estate prices declined only subtlety in 2006. It wasn’t until the majority accepted that real estate had moved into a secular bear market that price reductions became more realistic. We are not there yet.

It is also important to note that CREA performed a well-timed (but perhaps valid) reconciliation of their MLS database in June. Total listings moved from roughly 230,000 in March to nearly 260,000 in June. Within the space of a day, total listings moved back to 240,000. Just for anyone following that number – it is not a good indicator of where we are at.

We have just seen very depressed sales figures through the ‘hot’ spring and summer months. No new interest rate cuts will be available to shock the market with. Current rates are still very stimulative but buyers feel safe that those rates will be available tomorrow and as a result, they no longer have a significant impact on over-indebted consumers. Costly home-buying tax breaks or incentives may have lost their shine after watching their spectacular failure south of the border. This could be a very difficult market to turn around. Especially as the broader economy suffers from household credit whose growth is now slowing. Falling home prices combined with stagnant credit growth will compound one another.

Jonathan Tonge
www.americacanada.blogspot.com

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Canada versus the PIIGS - Who's more indebted?

2010-05-20T15:31:00.006-04:00

I came across a post on Naked Capitalism titled German households owe more than Greece's do.

I thought it would be interesting to see how Canada stacks up against the PIIGS in terms of public, company and household debt-to-gdp.

Net Government, Company and Household Debt

net government debt

Click for a larger image

The above chart uses net government debt rather than gross public debt. Net government debt is total liabilities minus total assets. Assets can mean different things to each country, but usually includes the savings in public pension plans (CPP) and other financial assets. Net debt is a useful perspective when evaluating the solvency of a country, as countries who have accumulated a significant amount of them can liquidate them in the event of default. Net public sector debt can be referred to as the negative net worth of the country.

Gross Government, Company and Household Debt

gross government debt

Click for a larger image

Gross government debt is the stock of outstanding government liabilities. The above chart shows what is owed, assuming that Canada does not liquidate its assets such as the Canadian Pension Plan.

Results

Canada is marginally in second place to Ireland in terms of total debt-to-gdp. Canada has significantly higher household debt than all other countries. In fact Canadian households owe more than both Greek households and businesses combined.

Jonathan Tonge
www.americacanada.blogspot.com

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Listings - The 2.1 Tipping Point?

2010-05-19T11:21:00.000-04:00

This is an observation of the chart shown above released by CREA the other day. The pink annotations on the chart were made by me.

The chart shows monthly home sales and monthly new listings across Canada. Note that these are seasonally adjusted (SA) figures.

New listings-to-sales ratios

Descriptions of letters as depicted on the chart above:

A: Late 1989 - inventory increases while sales remain strong. New listings-to-sales ratio hits 2.1. Ratio then explodes to 3.8 in early 1990. Housing takes steep downturn that lasts nearly a decade.

B: Between 1998 and 2002 listings decrease while sales strengthen. New listings-to-sales ratio hits 1.1 signifying the beginning of the longest housing boom in Canadian history.

C: By April, 2008 the new listings-to-sales ratio hits 2.1. The housing boom is declared dead. Prices collapse 11% by October (and the ratio hits 2.6 a few months later).

D: Interest rates are cranked lower in the recession (yes housing was saved by the recession, not caused by it). Listings are reduced while sales rebound. By March 2009, the new listings-to-sales ratio hits 1.4. The average Canadian home price increases by over 20% in the next 9 months.

E: April: new listings-to-sales ratio moves above 2.

Buy low, sell high

No matter which way you cut it, it appears that it is better to buy when the ratio falls below 2 and to sell when it moves over 2. Sharp leaps in inventory in all cases proved to be devastating for the housing market. They are strong signals for a market peak as home sales quickly fell thereafter (making the spread even wider).

A ratio below 1.5 is a signal of a market bottom.

What has occurred in 2010 to listings is simply unheard of. The slope of the new listings line is incredibly steep. The only year somewhat comparable was 1989.

Canada's real estate - 1990 versus 2010

1990

Dollar for dollar homes were less affordable due to higher interest rates and shorter amortizations
Only 62.6% of Canadians owned their home (ref)
Unemployment at 7.8% and rising (ref)
Issues of CMHC NHS mortgage-backed securities totaled $5.3 billion in the four years between 87-90 (ref)
Inflation at 5% (ref)

2010

Debt levels today are in real terms 2.5 times as high as they were in 1990 (ref)
Inflation-adjusted national average home price is 55% higher today than in 1990 and 84% higher than in 1999 (ref1) (ref2)
Home ownership rates are at record highs (est. 70% 2010 as it was 68.4% 2006) (ref)
CMHC has extended government-backed insurance to anyone wanting to buy, ensuring that the pool of buyers had been maximized (ref)
Global financial crisis, unemployment at 8.5% and stabilizing (2009) (ref)
Debt-to-assets ratio in Canada is the world's worst (during a global credit bubble no less) (ref)
Household formation to slow as household size begins to stabilize (was 3.5 people per household in the mid 70s and is now around 2.46)
Domestic population growth slows/contracts (completely reliant on immigration now)
Deflation is king (ref1) (ref2)
Huge demographic shift as baby boomers retire; there will be a need to extract cash from real estate equity - I personally doubt there will be enough buyers left to fund the desired level of extraction
Issues of CMHC NHS mortgage-backed securities in the four years between 2006-2009 totaled over $423 billion. (ref)

Will interest rates rise by much?

Rising interest rates are a catalyst for real estate price corrections.

It will be interesting to see what happens if interest rates rise (or don't rise/fall due to a double dip and deflation). Due to the debt burden, Canadian households have never been more sensitive to an interest rate increase. Assuming that fiat money holds its credibility, don't expect uncontrollable inflation for many years. A tiny jump in interest rates will trigger strong deflationary forces.

That may mean interest rates stay low. It also means you can't depend on inflation to increase the price of your home or shrink the burden of your debt. That's not good news if housing goes south and with it, its equity.

Jonathan Tonge
www.americacanada.blogspot.com

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BP Disaster - Deepwater Horizon on 60 minutes

2010-05-18T20:38:00.000-04:00

Part 1

Part 2

Part 3

Part 4

Please visit the 60 minutes website for more videos and extras.

Jonathan Tonge
www.americacanada.blogspot.com

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Canada's Exports - Not a V-shaped Recovery

2010-05-18T11:24:00.000-04:00

Chart by Statistics Canada. Red annotations by me.

Canadian exports decreased in March ending six consecutive months of increases. Export prices fell 2.6%, led by a 4.9% drop in energy prices. Export volumes grew 1.9%.

Despite all the praise for Canada, exports in our export dependent economy do not appear to be seeing a strong rebound. In fact by this measure, the economic recovery in exports stalled back in December 09.

Highlights

While energy exports dropped, energy imports increased, led by crude petroleum which rose 17% due to volume. My friend MS is looking into the reasons behind this. update:

"a guy here who follows oil and gas pretty closely figured it was a result of the price differential between the Eurozone and Canada.. since prices were a bit better here.. they turned around the LNG ships and brought it here."

Exports of precious metals increased 47% to a record $1.5 billion. Imports of precious metals accounted for 2/3 of the increase in imports, reaching a record $1.0 billion. That's telling.

Imports and exports of industrial goods and materials had strong gains.

Imports of other consumer goods dropped 2.3% to $4.6 billion, a level not seen since April 2008. Miscellaneous end products, including sporting goods, toys and pharmaceutical and medicinal products led the decline. Prices of miscellaneous end products have been decreasing since March 2009, despite increases in volume. That's deflation.

Jonathan Tonge
www.americacanada.blogspot.com

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Canada's Median mls 'Home' List Price by City - May 17, 2010

2010-05-17T13:42:00.000-04:00

The estimated median mls list price for a 'house' in selected Canadian cities is provided below. The median price is where 50% of the homes listed are priced above and 50% are priced below.

Note that this is not median or average sale prices. This is the median price of the housing inventory available for sale in select cities. If you went to your real estate agent and said you wanted to see all the houses available for sale in your city, and then bought the house where 50% of the homes were cheaper and 50% of the homes were more expensive, this is what the asking price would be.

This does not include the effect of bidding wars, a routine procedure in Toronto where listings are often sold for more than $200,000 of asking. It also does not account for the fast moving, less expensive inventory.

A 'house' is anything that has been classified as one in the system, and usually refers to a detached or semi-detached (although some improperly classified towns and multi-unit buildings are included). It does not include town, condo or apartment.

Please click on the image to enlarge.

Population and estimated median list price by city:

1. Greater Vancouver area (pop. 2.3 million) $750,000
     Vancouver/N. Van./W. Van. (pop. 750,000) $1.25 million
   Vancouver eastern suburbs (est. pop. 1 million) $625,000

2. Victoria (pop. 80,000) $675,000*

3. Greater Toronto Area (pop. 6.6 million) $575,000
      Oakville (pop. 170,000) $775,000*
      East Toronto (est. 1.25 million) $660,000
      Mississauga (pop. 700,000) $625,000
Vaughn (pop. 240,000) $620,000
      West Toronto (est. 1.25 million) $550,000
Milton (pop. 65,000) $510,000
Burlington (pop. 170,000) $425,000
      Brampton (pop. 450,000) $360,000
Pickering/Whitby (pop. 200,000) $360,000

4. Calgary (pop. 1 million) $433,000

5. Edmonton (pop. 730,000) $425,000

6. Ottawa (pop. 815,000) $350,000

7. Saskatoon (pop. 250,000) $340,000

8. Montreal and suburbs (pop. 3.7 million) $315,000

9. Halifax (410,000) $260,000

10. Regina (pop. 200,000) $255,000

11. Winnipeg (pop. 640,000) $250,000

12. St. John's (pop. 100,000) $160,000

Note that these are median list prices for housing inventory. They are not average sale prices.

Jonathan Tonge
www.americacanada.blogspot.com

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Beijing Property Prices Down 31.4% in One Month

2010-05-14T16:12:00.000-04:00

After rising nearly 70% in the past year, Beijing home prices have fallen by 31.4% in the past month. According to Capital Vue, the average transaction price of residential properties in Beijing plummeted to 16,898 RMB per square meter. In the last weeks of April, transaction volumes for commercial residential real estate fell 10.3 percent, 11.4 percent and 30.1 percent respectively.

On March 4, 2009 China, worried over social unrest and high unemployment, announced a $586 billion US stimulus package worth roughly 14% of its GDP. The state run economy also encouraged the banks to lend to private consumers to stimulate domestic demand. As a result there was at least twice as much credit issued in 2009 than in 2008. In all, China reported $1.4 trillion US in new private loans, over 30% of its GDP and although this figure seems high, there has been significant speculation that the amount released was much higher.

Property prices in Beijing soared by 67% and 68% in Shanghai between March 2009 and March 2010. A fixed rate mortgage policy of 4.1% regardless of creditworthiness and property tax advantages has been the fuel thrown on already exuberant property buyers. Despite attempts from its government to prevent a financial bubble, warning banks to increase their deposits and capital on hand, the bubble now stands at epic proportions – and it has popped.

Could China's Excesses Douse the Global Economic Recovery?

Hedge fund manager James Chanos and former Morgan Stanley chief Asia economist Andy Xie claim that China is in a “monumental” property and fixed-asset investment bubble. Chanos says that the likeliness of ‘gently’ deflating a bubble of this magnitude is slim.

Jack Rodman, 63, and president of Global Distressed Solutions, resides in Beijing and sells distressed property loans to investors around the world. He’s confirmed that 55 office buildings in Beijing are completely empty, and that half of the city’s commercial space is vacant.

Another 1.2 million square meters of office space in Beijing will be added this year, adding another 13% to available office space for lease.

Why State-Run Economies are Inefficient

To be sure, China was already suffering from excess capacity prior to the Global Financial Crisis. According to the Chinese General Administration of Customs reported that 3,631 toy exporters, or 52.7% of the industry, shut down in 2008 alone:

In 2005, China built the World’s largest mall in the city of Guangzhou located in the province of Guangdong. The South China Mall has become a poster child of the extraordinary misallocation of resources occurring in China. The majority of the mall sits empty to this day:

In 2004, China began construction on a new city capable of handling 1 million citizens in a likely attempt to increase its reported GDP growth. New Ordos, located 30km from the city of Ordos, is uninhabited. The perfect roads and beautiful homes are all owned and operated by Chinese speculators. At the moment, it is too costly for the neighboring citizens of Ordos to move into the new city, and without an economy, that doesn’t look like it is going to change in the near future:

Irrational Exuberance

China’s property market hasn't exactly been stable over the past few years. However the previous two downturns in Shanghai’s property (06 & 08) market were recovered thanks to state intervention, high economic growth and population growth. As a result, the market remained expensive and confidence in real estate was increased.

By December 2009 average property prices in Beijing reached 27 times the average income of its citizens, five times the worldwide average. The average price to rent ratio flew past 500:1, over 60% above the international ‘alarm’ ratio. 60% of the properties purchased were for investment purposes.

New apartment prices in Beijing have doubled in the past year. The cost per new square meter is 21,164 Yuan ($3,180 CDN) which means that a 1,000 sq foot apartment would cost roughly 2 million Yuan ($300,000 CDN). That is over 72 times the average Beijing income of 26,738 Yuan ($4,018 CDN) per year.

Goldman Sachs has been selling off some of its Shanghai properties. Goldman made money on every trading day in the first quarter of 2010.

Just a month ago, Shanghai property buyers were maxing out all available lines of credit and loan opportunities to buy real estate - scared that if they didn’t act now, they would miss the boat. The ship is now full and it is sinking. Congratulations.

The Yuan

China might as well dig a hole to North America to keep its people happy and employed. They could monetize the expense. I just wouldn’t want to be holding any Yuan when the financial losses were realized.

The Yuan (aka Renminbi) might be undervalued as investors suspect. However, given the misallocation of resources within its economy, it may also be incredibly overvalued. The fact that China lent a fortune producing a whole lot of nothing may very well be why China is now seeing rampant inflation in its core goods. Too many dollars are now chasing too little in terms of productive utilitarian products such as food.

This inflation should disappear when credit deflation becomes the name of the game. The resulting loan losses will in turn be monetized, leading to a depreciation of the currency. How much is the question.

China may see economic growth in its GDP calculations. But it is far from the higher quality growth seen in free market capitalist economies.

Please also see the previous post: Property Bubbles In China & Australia; US Home Prices to Continue Their Decline.

Jonathan Tonge
www.americacanada.blogspot.com

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Property Bubbles in China and Australia; US home prices to continue their fall

2010-05-12T22:55:00.001-04:00

China's Property Bubble

Average home prices in Beijing jumped 66% last year and in Shanghai, a "massive" 68%.

Yi Xianrong, Professor of Finance at the Chinese Academy of Social Sciences says that in big cities like Beijing, the problem isn't that people can't afford their homes. It's that the fact that people here can't imagine that the prices soaring so fast, and how big this bubble is.

"Buying a house today is like buying cabbages, more than ten people are bidding for one house. Everyone is speculating. The bubble is really big."

The financial meltdown in the US and Dubai were both largely veiled by the same problem – excessive housing speculation and easy credit.

"China isn't just making the same mistakes as the US, but it's even worse. China has adopted a universal mortgage rate of 4.1% - without discriminating against those with bad credit".

Credit and tax policies are to blame along with rampant speculation. The real estate bubble may only exist in China's big cities - however these big cities account for 80% of the entire real estate market in China. More shocking is that 60% of buyers bought houses for investment reasons.

January 2010:

Charlie Rose: China's Bubble May Burst (April 09, 2010)

"You get a tipping point. You get this moment "I got to get out while I can" and the buyers dry up. It's as old as markets.

We're all looking at the RMB as undervalued. Everyone is looking for China to peg its currency higher. By having to nationalize lots and lots of real estate bad debts, the RMB is devalued. That's something noone is expecting".

Home Price Discounts Offered (May 06, 2010)

Has the credit bust started in China?

United States Home Prices to Fall Further

Dean Baker called the housing market correctly before the crash. Asked if the US housing market is seeing a sustainable recovery:

Dean Baker: "No. I mean I think people who are seeing that aren't paying attention to what is in front of their eyes. Prices were plummeting at the beginning of 09, and then we put in a series of supports to sustain the market: we had the first time home buyers tax credit, the initial one ended in November, and it was then extended to April, that has ended also. The fed stepped in and bought up mortgage backed securities in a huge way – buying up 1 and a quarter trillion dollars worth. Pushing the interest rates for 30 year rate below 5%. Then HUD (Dep't of Housing & Urban Development) played a huge role in the market – basically replaced subprime and accounted for 30% of mortgage purchases in 2009. All three of these are coming to an end."

Mortgage rates likely to head back to 5.5-6% by the end of the year

HUD is being forced to cut back on lending due to losses in 2009 effecting their capital requirements

Glut of rentals, vacancies at record levels

Rent prices falling

"Why would we want artificially high home prices? Is it fair to tax the future home buyers to pay for high home prices? It's a very warped policy"

Housing Optimists are Not Paying Attention

Australia

"Australia's housing downturn was relatively short lived. We are now heating up quite substantially in most cities". When Shiller was asked for his reaction to that, this was his reponse:

Shiller: "It has bubble aspects to it. Maybe I shouldn't say that. I'm a foreigner. I'm not. I was recently in China and I got to talk to a lot of people. I could smell, and sniff, a bubble there. What I mean by that, people's judgments were influenced by rising prices, and rising prices were amplifying their optimistic stories. That's what happens in a bubble.

When I hear that in Australia, prices are going up rapidly, I'm inclined to suspect something similar to China. I think the Australians may well be deceived, that prices may never fall here. That Australia hasn't seen any significant drop in prices, that seems to me, a very intuitive way of thinking. But ultimately it's what makes it happen."

Robert Shiller suspects Australia in a housing bubble

Also, please watch Steve Keen (May 4th, 2010)

Steve Keen: "Housing prices are now 7 times median incomes, when the affordable level is about 3 times. The American level through all the crashing it's been through is back to 3.5 times. We're talking about a house price level of twice the level that America got to. That means unfortunately that in the long term, the direction of house prices is down.

Our debt levels here are slightly higher than those in America. Prices have to drop, they're simply not affordable."

Canada

Expectations that home prices are simply "stronger here", and won't fall, combined with lax monetary and fiscal policy, is exactly why Canada hasn't seen a sustained price drop. As Shiller stated that belief is "ultimately what makes it happen".

Please consider Fast and Furious Decline Coming To Canada by Mish Shedlock (May 12, 2010)

Canadians will not know what hit them when the plunge in real estate prices starts. It will be fast and furious just as is happening in China and just as happened with condo prices in the US.

Sentiment on condos changed in the US very quickly, in some places overnight. The same is happening in Canada. At first inventory rises, then a "head for the hills" mentality sets in. By then it's too late as the pool of greater fools has already run out.

Next time, home prices won't come back.

Jonathan Tonge
www.americacanada.blogspot.com

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Dow Drops 998 Points, Largest Intraday Point Loss Ever

2010-05-06T22:23:00.001-04:00

An erroneous trade, potentially involving Procter and Gamble stock, was said to be blamed for the large drop in the Dow Jones today.

Here are a few pieces from a Bloomberg report that NYSE Humans Saved P&G Shares:

As other exchanges were in discussions over whether to cancel trades in a number of stocks, including Procter & Gamble Co. (PG), that traded erratically Thursday afternoon, the New York Stock Exchange touted its move to switch the trading in P&G to a human auction to prevent things from spiraling out of control.

On other exchanges Thursday afternoon, shares of Procter & Gamble had tumbled as much as $22.79, or 37%, at one point, to $39.37. But because the stock fell below a key circuit-breaker level called the "liquidity replenishment point" or LRP on NYSE, the exchange stopped its own electronic trading in the stock briefly to go into "slow" mode. Under that mode, the designated market makers on the NYSE floor are given an opportunity to come in on the other side of an order at a price they have time to think about.

In this case, there was a sell order for P&G. Lou Pastina, executive vice president of floor operations for NYSE, said the auction ran for about a minute and 20 seconds, and then the trade went through at a price of $56 even though at that time the stock was trading far lower elsewhere.

While it is possible that the stock market did fall in small part to a technical error (or possibly a very deliberate one), the sell off that ensued showed that there isn't a floor in this market when people get scared.The psychology out there is incredibly bullish. The latest Investor Intelligence poll indicates that 56% of investors are bullish on this market, while only 18% are bearish. If you think like a contrarian, then the downside risk when bullish expectations are missed is significant. Perhaps this is best explanation of what we saw today.

Of course Citigroup denied any knowledge of an incorrect trade. They are a publicly traded company and would have released a statement to shareholders if it had any knowledge of such accident. It also does not make sense that a simple typing accident would permit a sale of $15 billion. A 'b' instead of an 'm' - that's it? This is all just hearsay. A rumor at this point that may have absolutely no backing whatsoever. Financial systems have special approvals that are required for sales of this magnitude. Management would have to approve it on the system before it was released. A two or three key system if you will.

I'd question whether this was a naked sale or if the shares even existed. Or was it that a computer trading system saw a collapse in the market forming and decided to immediately liquidate its assets? Did the computer trading systems perhaps test the limit prices in the market, and found that there was none? It's really just speculation, but the point I'm making is that this dip could just be the canary in the coal mine. This could happen again in a few days, weeks or months.With a market that is so incredibly inflated by large investment banks, there really isn't a floor to support the price levels were are seeing (by smaller institutional investors). If their systems are programmed to act in unison, then a crash of this magnitude is incredibly likely.

In a piece titled "Recession to continue in Q3 2010?" written in mid-January, I named a few reasons why a recession starting as early as the third quarter was possible. One was a sudden negative adjustment in Canadian housing sentiment leading to a slowing of private credit growth. That process has clearly started.

David Rosenberg issued a report today stating that home prices relative to incomes were 1.5 times the standard deviation of the norm, and home prices relative to rents were 2.5X! If history is any indication, he predicts a nationwide price correction of 15-35% which would "certainly be a U.S.-style correction."Loftier markets in Toronto and Vancouver would see above average declines.

From the looks of the latest TREB and REBGV, listings in both cities are skyrocketing while home sales remain high. According to Mish Shedlock, this is precisely what occurred in the final months of the US real estate bubble:

That is exactly how the bust started in the US: record units for sale with demand still strong. A few short months later demand collapsed while supply soared.

Of course others will argue with that theory, such as Jay Bryan from The Gazette in Montreal in What Housing Bubble?:

Canada's little housing bubblet is coming to an end. Here comes (maybe) the crashlet. This description doesn't make for a screaming headline, but it's about the best an honest analyst can do with Canada's stubbornly healthy, stable housing market.

Economist Pascal Gauthier at the Toronto-Dominion Bank now believes home prices across Canada will fall by an average of 2.7 per cent next year.

That's not a bad thing in a market where, by Gauthier's calculations, prices are now peaking at a level roughly 15 per cent higher than fair value, based on such fundamentals as income growth in recent years.

With prices edging down, then stabilizing, and incomes rising by about four or five per cent a year, the average home price could be back near fair value within three years, Gauthier suggested yesterday.

There is more in his original article so please take a look.

Bryan doesn't refer to debt levels even once in his analysis, so to be quite frank, either it is meant to be misleading to satisfy news advertisers or it is not well thought out. Incomes' rising by 4-5% per year is an absolutely ridiculous expectation in a deleveraging, post-crash economy.

Of course coming from Montreal you're not exactly at ground zero. Furthermore, he does not appreciate the sheer size of the Greater Toronto's Housing Market. The GTA and the GV make up nearly 1/3 of all homes in Canada, and priced where they are, punch above their weight in terms of adding to Canada's household credit expansion. That credit expansion fuels the majority of the growth in Canada's economy. In fact David Rosenberg recently reported that in real terms, without the housing boom/bubble, Canada's economy would not have grown a single point since Q3 of 2009 (the bottom of the recession). If the housing boom reverses, with all else equal, we will be back in recession.

In my case for the potential of a double-dip recession in Q3/Q4 2010, other reasons I cited included:

Inventory levels have adjusted in the world, allowing a Q3 and Q4 2009 adjustment to growth. The stimulus packages have taken full effect, and will begin to be a drag on economic growth in Q2 2010. Credit has expanded at astronomical rates, causing bubbles as far as China and as close as the New York Stock Exchange. I can't see any more room for growth, and as such, the speculators should cash in any day now.

Sovereign debt will begin to be an issue. Is this massive credit expansion based on a reality - that countries around the world will be able to grow beyond this debt? Debt afterall is a drag on growth once it stops expanding. With a lack of real business investment over the past ten years, I don't foresee this happening.

What if Paulson or Geithner get indicted? Noting the public outrage against central banks, such actions would change the ball game. Investors have been investing based on a zero risk environment. This environment would be ditched if the individuals responsible for such policy choices were held accountable. Similar individuals would simply not risk their careers or reputation by crossing this boundary again (which in my opinion is a good thing).

That zero risk environment is now being put to the test, as central bankers evaluate the pros and cons of a Greek bailout. The bailout will do more harm than good. It's clear that the EU won't be able to arm twist Greece once the funds start to flow. This leaves them in a position where they are restricted from pulling the plug in the future or else risk rattling the bond markets, nor can they refuse other countries that come begging for assistance. Who will want to be a part of this union that taxes the fiscally prudent and transfers that wealth to those who spoil themselves with irresponsibility? Even talking about changing the ECB's collateral rules destroyed the Euro's credibility.

Of course make no mistake. The markets are no longer trading on fears of a Greek default. We are now entering into the next phase of the global deleveraging process. In an age where nations have backstopped the weak links in the market, it was only a matter of time before investors started to question the sustainability of that insurance.

CNBC reports "Greek Debt Crisis On Verge Of 'Going Global'"

"We've seen a crisis start in a country—Greece—become regional, impact the whole of the Euro zone and is on the verge of truly going global," said El-Erian, CEO of the world's biggest bond fund.

He said the debt is a "transmission mechanism to go from country to region to global. So we should take this very seriously."

S&P 500 banks fell financials fell nearly 5 percent as investors worried about the financial system freezing up again, similar to what happened when Lehman Brothers collapsed in September 2008.

One trader who spoke on condition of anonymity said fixed-income desks in Europe shut down early for the day and that "European banks are halting lending now."

"What you see is the system slowly starting to have cascading failures. It's like a pipe that you need to be free-flowing and it starts to clog, and that's a concern," El-Erian said. "This is a shock to the system and it's going to have an impact on valuation."

Please visit CNBC's website by following the link above for more on this article.

Expect heightened bond market risk leading to further austerity demands in other countries such as UK, US, Japan and Canada. Countries are piling on debt at a record pace, while their economies barely stutter along thanks to a lack of properly allocated business investment. Recently Willem Buiter, CE from Citi created a lengthy report that discusses the likeliness of inflation and austerity in developed nations. Below I've quoted a Wall Street Journal article titled The Death of the Triple-A Sovereign:

Are we witnessing the end of the gold-plated triple-A-rated sovereign borrower? Willem Buiter, Citigroup's chief economist and a noted academic, thinks so.

In a new piece of research, released today, the former member of the Bank of England's Monetary Policy Committee argues that in five years' time, there will be no top-rated governments left.

The good news in his 68-page report on Sovereign Debt Problems in Advanced Industrialized Economies is that, on the whole, governments won't default. The bad news: Most will have to embark this year on five or 10 years of severe fiscal austerity.

Mr. Buiter identifies seven rich-country governments in reasonable financial shape: Australia, New Zealand, Denmark, Norway, Sweden, Finland and Switzerland. Some other advanced economies — such as Canada, Germany and the Netherlands — appear in relatively good shape "only compared to the truly dire conditions experienced by most of their peers."

He says the current market focus on the five weakest members states of the euro zone is surprising given that the fiscal and financial position of the euro area as a whole is stronger than that of the U.K., the U.S. and Japan. Sooner (the U.K.) or later (Japan and the U.S.), these three countries are at risk of being denied access to new funding "unless there is a radical change of course by those in charge of fiscal policy."

These sovereign debt problems are "the logical final chapter" of a classic 'pass the baby' game. As they defaulted on mortgages and other personal debt, excessively-indebted households passed some of their debt back to their creditors, the banks. The banks, themselves at risk of default, passed their debts to governments. And now over-indebted governments are passing the debt back to households, in the form of higher taxes, lower public spending, the risk of default or through inflation.

The deterioration of rich-country finances contrasts with the fiscal restraint demonstrated by most emerging markets. Only one large emerging economy — India – is among the high deficit countries. It has a ratio of gross government debt to GDP of more than 80% and a deficit of 10% of GDP, but the growth of nominal GDP last year was 11.5% so the burden on the economy didn't grow. Most of its debt is in domestic currency and owed to Indians but it is "highly vulnerable to a sudden weakening of nominal GDP growth," Mr. Buiter says.

He argues that the world may be moving to an era where there is no risk-free security. "Triple-A sovereign ratings may in the not-too-distant future be found only in the history books," he says. Countries at imminent risk of losing their triple-A status include the U.K.; France (like the U.K., because of its large and persistent structural budget deficits); and Switzerland (a weak central government with a banking sector with a giant balance sheet.) Unless there's a change of course, the U.S. and Germany could join them. With Japan already rated double-A, there may be no triple-A sovereign rating left in five years.

To get the debt on a sustainable path, he says that the U.S. will have to slice at least 7.3% of GDP permanently from the budget deficit; and the U.K. at least 6.8%. "In neither country are policy makers debating how to achieve anything like these degrees of fiscal tightening," he writes.

Please click the link above to see the rest of the Wall Street Journal's story. There is plenty more in his original report. His assessment that countries are likely to wait for the bond market to twist their arms into austerity is very likely. There simply isn't any political capital to pull the plug until the very end, especially when pulling the plug is likely to send your economy back in to recession.

Jonathan Tonge

www.americacanada.blogspot.com

Housing 'Bubble' Nears its End

2010-04-01T22:14:00.000-04:00

The Bank of Canada reported that the growth in outstanding NHA mortgage-backed securities (MBS) slowed in January. February marked the first month that the MBS balance decreased since August of 2008.

Bank of Canada: Residential and Household Credit

Canada's Economic Action Plan's $125 billion Insured Mortgage Purchase Program finally came to an end yesterday. The program eliminated the risk to banks, encouraging them to extend credit. In the event of a credit shock the banks could strengthen their balance sheets by offloading insured mortgages onto taxpayers.

No surprise than that the Teranet-National Bank National Composite House Index reported that January home price inflation was at its slowest pace since values started to recover early last year.

Furthermore, the Royal Bank of Canada announced that despite record low interest rates, home affordability was eroding. After a similar announcement in early 2008 the banks responded by removing the discounts on mortgages.

The banks raised fixed rates this week in response to the added risk. The Royal Bank of Canada led the pack by raising the advertised rate on the 5 year term by 0.6%. Other banks soon followed. Note that with Flaherty's new mortgage rules that these changes will make it more difficult to qualify for a variable rate mortgage as well.

This at a time when the Conference Board of Canada announced that over 20% of Canadians are struggling to afford their homes. RBC reported that 65% of Canadians are losing sleep over their finances:

....According to the March RBC Canadian Consumer Outlook Index, most Canadians (65 per cent) are losing sleep over their finances. More than one-in-four Canadians (27 per cent) are up at night worrying about paying off their debt, followed by nearly one-in-five (18 per cent) who worry about having enough for retirement and 16 per cent who worry about having no emergency fund...

As noted in the Country of Fiscal Prudence, the Canadian financial literacy task force will be looking into the following:

With the Bank of Canada's interest rate set at 0.25%, how is it that 1/3 of Canadians are struggling financially? What happens when interest rates double, and the cost of debt does as well?
Studies suggest that Canadians are wildly overly optimistic about their financial picture.
Why Canadians feel that they'll retire comfortably but can't verbalize or explain how that will happen...

So while only 18% of Canadians worry about funding retirement, studies suggest that a decent portion of those not worrying should be.

CIBC reported in the Globe and Mail that Debt Will Bite Consumer Spending

The debt-to-income ratio, as a result, hit a record 147 per cent in December, and is accelerating at the fastest rate since the mid 1990s, Mr. Tal said.

Household debt is also climbing faster than assets, he added.

Some measures are improving – the savings rate is climbing and personal bankruptcies, though historically high, are slowing.

But by his combined measure, Canadian consumer fundamentals are at their weakest level in almost 15 years.

“The practical implication of the reduced consumer capability as measured by our index is that consumer spending will disappoint in the coming twelve months,” he noted in the report entitled “Canadian consumers – more confident but less capable.”

As interest rates are poised to rise this summer, and that will have a heavy impact on shoppers, he added.

“Given the vulnerable starting point of the consumer, the Bank of Canada will soon find that even a moderate monetary squeeze will be sufficient to drive a material deceleration in consumer spending.”

It's worth repeating:."Given the vulnerable starting point of the consumer, the Bank of Canada will soon find that even a moderate monetary squeeze will be sufficient to drive a material deceleration in consumer spending"

We should expect to see a rate increase as early as June 2010. While it will be mild, expectations for further rate increases will impact mortgage rates.

The time is near. We will soon approach a point where the expansion of household credit begins to slow or even contracts. I don't need to repeat how this will go down, but rest assured the supply of homes will rapidly increase and demand will fall. Lenders will react. Prices will follow suit.

Jonathan Tonge
www.americacanada.blogspot.com

Comments are open to the public. Please share your opinions, links and ideas with other readers.

Stimulus is Not the Answer

2010-03-21T21:31:00.000-04:00

Krugman writes in the New York Times, The Soft Bigotry Of Low Expectations, IMF Edition

John Lipsky, the #2 man at the IMF, is quoted today as calling for early fiscal retrenchment:

"While it makes sense for the world’s largest economies to continue stimulus spending through the end of this year, “fiscal consolidation should begin in 2011, if the recovery occurs at the projected pace,” Mr. Lipsky said.

The projected pace presumably means the blue line above, which is taken from the IMF’s World Economic Outlook Database. The red line shows what would have happened if growth were to continue at its average pace from 2000 to 2007.

As you can see, what Mr. Lipsky apparently considers an acceptable result, good enough to pull back stimulus, is basically to accept the losses in output during the crisis as permanent, leaving us on a drastically lower trend as far as the eye can see.

Krugman fails to recognize the massive credit bubble that fueled the unsustainable growth from 2001-2007. That growth isn't coming back. He ultimately believes that the only way out of a debt bubble is to spend more money that you don't have. Well he's actually right about the short term results - it does feel good. But the assumption that it's a way out is completely wrong. Credit inflation larger than economic growth is not sustainable and it is not a 'way out'. It is simply delaying the inevitable.

In the absence of stimulus, the economy will revert back to what it was going to do if the stimulus had never been there. There is no logical argument that more debt helps economies in the long run, unless that debt is backed by strong investments in technology or much needed infrastructure. 'Ready-to-shovel' stimulus projects are neither and that's pretty much what we have seen.

In fact stimulus seriously damages the economy. First it is extremely costly. The debt hangs around for decades, driving up interest rates, taxes and government cutbacks. These forces are incredibly deflationary. Deflation in a healthy free market economy is a good thing, as it increases purchasing power and wealth. But deflation caused from falling disposable incomes is not.

Second, 'stimulus' is the elected few trying to determine what is important and what is not important in the economy and then forcing the allocation of resources into these areas. Stimulus creates opportunities that the market attempts to capitalize on. Labour, management, capital and other investments are hired or purchased, operations are set up, clients are acquired and value chains are assembled. Worldwide, trillions of dollars are being spent right now either directly or indirectly chasing stimulus dollars.

That stimulus won't necessarily be there in a few years. When those dollars dry up, the misallocation of resources will be obvious. The returns that investors thought would be there, won't. The economy will then need to restructure. By that time it is likely interest rates will be higher and the inclination for investors to take on more debt will be greatly reduced. This is incredibly costly to economic growth. It damages the wealth of nations and investor confidence.

Third, lower interest rates don't spur real investment. They spur speculation and are used to inflate asset prices. Higher asset prices are not good for the economy. The paper returns in RRSP portfolios may feel good, and through the wealth effect, may induce you to take on more credit and consumption, but eventually those returns end. If asset prices remain high, the economy will restructure itself to use less of those costly inputs. Economic transitions are incredibly expensive and do not necessarily provide real economic benefits to society. Furthermore, when the economy decides to restructure itself away from those assets and as a result, demand falls, the asset price will crash if its price was supported primarily with cheap money.

Speculation may be profitable in the short run, but it is gambling. It doesn't provide any real economic benefit to the overall economy. My advice to politicians is that if you want to grow your economy, you have to get back to what it really is. Economic environments should be measured by how well they foster innovation, how quickly they adapt and by how efficiently they produce utilitarian goods and services that people actually want to buy. Levels of credit and savings reflect the ability to spend more or less in the future. A combination of great investments in productivity and innovation, along with low levels of debt and increased savings makes for the strongest of economies. Stimulus encourages the exact opposite.

Unfortunately Krugman and most other economists just don't understand this. Furthermore, politicians, government agencies and crown corporations may not like my answer that the best way to achieve this growth is if they simply get out of the way. You are the problem, not the solution.

Jonathan Tonge
www.americacanada.blogspot.com

Comments are open to the public. Please share your opinions, links and ideas with other readers.

The Country of Fiscal Prudence

2010-03-12T22:51:00.000-05:00

Canada.

The land of the strong and free. The land of fiscal prudence. Or so we have been told.

Jim Flaherty has been so surprised that Canadians believe him when he says that we are fiscally prudent, that he has decided to assemble a task force to look into the matter. Headed by Don Stewart from SunLife, the team will dive deep into this quandary.

After an email conversation with Australian economist Steve Keen, I had the impression that he might be involved in this task force as well. He's got a good head on his shoulders. These are the questions he'll be pondering:

With the Bank of Canada's interest rate set at 0.25%, how is it that 1/3 of Canadians are struggling financially? What happens when interest rates double, and the cost of debt does as well?
Studies suggest that Canadians are wildly overly optimistic about their financial picture.
Why Canadians feel that they'll retire comfortably but can't verbalize or explain how that will happen...

Well I can answer why they feel this way. The government, banks, media and associations in this country keep telling Canadians that they're fine. In fact they brag about how financially responsible Canadians are to people around the world.

But here is the reality. We've been living a lie. We've been listening to interested groups of people who of course benefit from our inaction. The truth is we have been anything but financially prudent.

This is what Don and Steve will find:

(Note that there has been some confusion on this blog about the following graphs. The graphs show the actual changes to outstanding credit (blue line). They also show two other lines. Both make changes to the 1999 balance only (or 2002 in the case of household credit). The inflation line shows what the credit would look like had the 1999 balance grown at the rate of inflation. The purpose of the disposable income line is to show how much debt would exist if the debt-to-disposable income ratio was maintained at the 1999 level - which even then was a historically high figure)

CREDIT CARD BALANCES - 1999-2010

Credit card balances are up 458% in 11 years.

Please keep in mind that when credit inflation is this large, you have to question its impact on disposable incomes - that is, are those incomes sustainable when the credit ceases to expand or more likely, contracts. They are not and as evidence of this, real wealth gains would drive the debt to disposable income rate down. Real higher incomes provide savings and the ability to pay down debt. The fact that this is not the case, suggests that the incomes and the economy are heavily inflated by debt.

Credit Card Balances - Canada - 1999-2010

Note that in the graphs I adjusted the total credit outstanding in 1999 to reflect both inflation and disposable incomes over the course of the decade. This gives you an idea of what the 'real' amount outstanding in 1999 would look like today.

(ie. $11.5 billion in 1999 has the same worth as $14.5 billion today)

RESIDENTIAL MORTGAGES

In 1999, outstanding residential mortgage debt was $399 billion. Eleven years later, it has expanded by 242% to $965 billion.

Residential Mortgage Debt - Canada - 1999-2010

That looks scary. The $965 billion is the figure quoted most often by the media, and even myself. But it's missing an important trend that has occurred over the past ten years. Canadians have been tapping into the their home equity to finance purchases and mortgages at extraordinarily low variable interest rate through Home Equity Lines of Credit.

PERSONAL LINES OF CREDIT

Home equity lines of credit have become the drug of choice for Canadian consumers. They use them to finance everything from cars to furniture to home renovations, and of course, mortgages.

Between 1999-2010, lines of credit grew 820% to $205 billion.

Personal Lines of Credit - Canada - 1999-2010

HOUSEHOLD CREDIT

As a result of credit cards, lines of credit and residential mortgages, household credit has expanded from $669 billion in 2002 to $1.41 trillion in 2009. Despite a small reprieve for a couple months in early 2009, it has been growing by roughly ten billion per month. By the end of 2010, Canada's household debt-to-disposable income will be roughly 155% (currently 146%).

Household Debt - Canada - 2002-2009

In my next post I'll prove to you that we weren't even in good shape in 1999 or 2002. This trend started in the 1980s. I'll also discuss why economies that are inflated by credit tend to be more stable with shorter and less intense recessions - hence why Canada's economic picture has been so rosy since the mid eighties. In fact the only period where household credit decelerated was during 1990-1995 - look at how that worked out for us. And in this coming credit contraction, you should expect volatility, with recessions occurring on a regular basis every few years. They will be sudden and damaging.

Jonathan Tonge
www.americacanada.blogspot.com

Comments are open to the public. Please share your opinions, links and ideas with other readers.

National Bank says that "Canada is in Decent Shape"

2010-02-22T21:20:00.000-05:00

Well then that says it. National Bank tells us that there might be a little shock if interest rates rise, but overall we still have less debt than the USA. So why worry then?

Here is the chart that backs their point:

Click for a larger image.

Courtesy of the Globe and Mail. Read article in full here.

Well that is a significant growth if you look back to 1990 when our debt was only 90% of disposable income, whereas USA had nearly 110%. It does make sense that mortgage debt would be higher in the USA as it is tax deductible.

But certainly Canada's debt growth doesn't look as scary as the growth in US debt. Or does it?

Well to answer that you need to forecast the next three years. Let's assume two different situations. Feel free to add a third.

The first situation is that Canada experiences a USA style housing collapse starting in Q3 2010. At first the contraction is mild, just like it was in the US. By early 2011 home sales and price declines accelerate. For arguments sake, assume that by 2012 housing loses 20% of its value and a further 20% by 2014-5.

The second situation is that Canada doesn't experience a collapse. Housing continues to grow "modestly", at roughly 8% per year just as it has prior to 2008. Fueled by lower interest rates, housing by mid-2012 is 20% more costly then it is today. Nice!

What effect would both of these situations have on the debt-to-disposable income ratio?

Click for a larger image.

First let's talk about the middle black line that falls on 2010. That's us right now. We are in the midst of passing the USA in debt-to-disposable income.

The horizontal yellow line marks what level of debt the USA was at when their credit crisis began. Canada will pass this point by mid 2010.

Our assumption with the green line is that for one reason or another, most likely rising interest rates, a housing bust or a recession, Canada begins the same journey as the USA did but four years later. To make it a similar contraction it would have to materialize primarily in residential mortgages and HELOC's as they make up 86% of household debt (just like the US by the way). That means that a housing bust would either be the cause or the victim of the credit contraction. Regardless, the result would be the same.

The government actively tries to douse the markets with more credit, but eventually by 2012 the market gives. It can no longer afford it. Credit begins its long descent and as it does, the sound of air rushing out the economy can be heard as an inflation of roughly 13% of disposable incomes is replaced by a contraction of 5%. The economy enters recession, unemployment rises by roughly 5-10% and incomes fall by around 5% per year.

The second assumption is that we do not experience the same fate in 2010. Instead, thanks to low interest rates and an absence of a recession, homes continue to appreciate (up 20% by 2012) and home sales remain strong. By mid 2012 Canada's debt to disposable income reaches 180%. The economy then experiences a Japanese style collapse and deflation ensues.

It is important to note that even if credit continues to rise steadily at 10% per year (higher than disposable income growth), we would still experience a parabolic rise in the ratio in the second example. This occurs as the growth is compounded. So as a 10% marginal increase in credit would send the ratio from 100% to 110%, it would similarly take the ratio from 150% to 165%, and then from 165% to 181.5%. You simply multiply the ratio by 110% each time. That's why you would expect a curve. That curve is also why you get a bust.

Credit contracts in both situations. The drop sure does look scary. But in both situations the debt ratio does not return to mid-nineties levels until 2025 (which was still high by historical standards).

Either way, despite National Bank's optimism, Canada is not in decent shape. We are headed towards a bust, one way or another. It's just a matter of time.

Jonathan Tonge
www.americacanada.blogspot.com

Comments are open to the public. Please share your opinions, links and ideas with other readers.

Update on Canadian Credit - Not Good News

2010-01-19T11:38:00.000-05:00

According to the latest release by the Bank of Canada, the outstanding balances of various credit types held by Chartered Banks (only) have expanded by the following amounts during the period of February 2008 - November 2009 (1 year, 9 months):

personal loans have increased 19%

balances on credit cards have increased 14%

'other' types of loans have expanded by 14%.

personal lines of credit have grown 39%

In the period of April 2008-October 2009 (1 year , 6 months)

NHA securtized loans (government insured and securitized mortgages) has increased by 67%.

total household credit (consumer credit and residential mortgages) grew 14% or by $165 billion.

Reflect on the economy over 2008-9:

According to the Conference Board of Canada, Canada’s income per capita fell in 2008—the first time this has happened since the 1990–91 recession.

The income gap between Canada and the U.S.—$6,400 per person in 2008—is double what it was in 1984.

At $6,400 per person Americans earn more than 20.2% per person than Canadians.

Canada's economy shrunk 5% from Q3 2008 to Q3 2009.

Average home prices are up 20% in 2009

Conclusion

The $56 billion increase in outstanding personal lines of credit is the equivalent of a 4% increase in Canadian disposable income over the 21 month period. It has been a massive stimulus on the domestic economy. This credit can not inflate at this rate forever and therefore will be a huge hit on retailers and contractors when the expansion ceases (or possibly even contracts). A modest drop in outstanding personal lines of credit could provide the equivalent drop of 6% of disposable income.

But that's just one type of credit. Total household credit expanded by $164.6 billion over the 1.5 year period from April 2008 to October 2009. This credit inflation represents a 13% increase in disposable income over the period. Almost all of this inflation was consumed in residential mortgages and home equity lines of credit. The rest was spent on consumption.

A housing bust would effectively stop this credit expansion and possibly shrink outstanding credit balances. When that happens, it will feel as though disposable income had just dropped by well over 13%. The result on the domestic economy and the circular effect of a credit deflation on house prices is predictable.

Interesting to see what happens when the Home Renovation Tax Credit (HRTC) expires on February 1st 2010. Without argument, the HRTC pulled demand forward encouraging the rise in personal lines of credit.

Jonathan Tonge
www.americacanada.blogspot.com

Comments are open to the public. Please share your opinions, links and ideas with other readers.

Housing Bubbles around the World

2010-01-17T22:45:00.000-05:00

Mish Shedlock has a great post up on his blog discussing housing bubbles around the world. Take a look at Canada and one would conclude that we are a "bastion of common sense."

Below is a sample of his post, but I recommend clicking the link above and reading the full article. There is an interactive graph created by The Economist that he has embedded. Note that he put some of my comments up as an addenum.

Mish: Canada is the surprising country. Here are charts that show what I mean.

House Price Index

Prices vs. Average Income

Those charts makes Canada housing prices look like a bastion of common sense. I assure you that is not the case.

Jonathan Tonge
www.americacanada.blogspot.com

Comments are open to the public. Please share your opinions, links and ideas with other readers.

Recession to Continue in Q3 2010?

2010-01-16T19:18:00.000-05:00

Canadian mortgage credit has grown 132% since 2000. A $1 in 2000 now costs $1.19 according to the Bank of Canada. With that in mind, CPI inflation has accounted for only 14% of the total growth in mortgage debt in the past ten years.

Debt was by no means low in 2000. The debt-to-income ratio was almost double what was present after the recessions of the early 80's.

In real terms wages certainly haven't increased since the 1980s. Wages in real terms are less than 10% higher than in 2000. The lower and middle incomes are in real terms, lower than in 1980.

The reason for this growth in credit was lower interest rates. In the early 1980s, central banks around the world switched their monetary policy strategy. Instead of focusing on the money supply, they would instead focus on interest rates. Interest rates provided them with the ability to surgically control CPI.

CPI fell year after year. By the 1990s it was well under 3%. By controlling interest rates, the bank lowered inflation, which allowed them to drop interest rates further. The process was incredibly accurate.

Unfortunately the definition of CPI did not change when the banks changed monetary policies. CPI was no longer relevant yet was still completely relied upon when setting interest rates. A change from controlling money supply to interest rates should have changed the focus from consumer prices to credit growth. This didn't happen.

Which gets us to where we are today. In a situation of massive credit growth during a period of low inflation.

You'd be blind if you didn't know what we are heading into. This will be a period that in fifty years, will still be reflected upon. We are hitting a secular peak in credit growth. Interest rates are 0%. As interest rates can't go any lower, the speculators will soon clock out. Their won't be any more gains left to be had. Any inflation that entirely depended upon credit growth, will disappear.

The banks models will be revised, after this pending crash. Don't believe me? Wait ten years and check back in. CPI won't be used by the central bank. It will be termed Consumer Price and Credit Inflation Rate (CPCIR). It will be weighted by the present value of assumed future income allocated to each.

Recession in Q3.

So here is my instinct. This reality check could happen now, or in a couple years. But my gut says at the end of Q2 2010.

Inventory levels have adjusted in the world, allowing a Q3 and Q4 2009 adjustment to growth. The stimulus packages have taken full effect, and will begin to be a drag on economic growth in Q2 2010. Credit has expanded at astronomical rates, causing bubbles as far as China and as close as the New York Stock Exchange. I can't see any more room for growth, and as such, the speculators should cash in any day now.

Sovereign debt will begin to be an issue. Is this massive credit expansion based on a reality - that the countries around the world will be able to grow beyond this debt? Debt afterall is a drag on growth once it stops expanding. With a lack of real business investment over the past ten years, I don't forsee this happening.

What if Paulson or Geithner get indicted? Noting the public outrage against central banks, such actions would change the ball game. Investors have been investing based on a zero risk environment. This environment would be ditched if the individuals responsible for such policy choices were held accountable. Similar individuals would simply not risk their careers or reputation by crossing this boundary again (which in my opinion is a good thing).

Look, if policy makers want to grow the economy, they're going to have to face an adjustment period. Policy has been completely wrong. You have to fess up now. It's going to hurt. But dragging the world economy further into this abysmal pit of nothing isn't helping.

A real economy depends on most importantly on PIDS. Productivity, Investment, Debt and Savings. It's so incredibly simplistic that you don't even need a high school education to understand it.

Productivity is the amount of goods or services you produce while you work; investment reflects the value of the goods and services you produce; debt reflects the amount you can borrow or that you have to pay back; savings tells you how much other's owe you. That's pretty much what it comes down to.

In Canada our productivity has dropped from at par with the US to 25% below its rate. Investment in the oil sands has been good. RIM, EA and a few other companies have made solid investments. But outside that it's been in real estate. Real Estate doesn't provide any future benefit to the economy, so you are effectively been borrowing against nothing. This choice of investment (which is really an expense) has of course forced debt to unheard of levels, despite economic growth. Savings in Canada have followed suit with the US, recently being lower than the savings rate down south.

What can you expect? Canada is completely misguided thanks to bad policy.

Don't get me wrong. Canada is stunning. It is a beautiful country possibly ummatched by any other. We have tons of resources, and can secure future energy supply for our citizens hundreds of years into our future. Of course we're not doing that. We're selling our childrens stake off now so some miner can earn a six digit salary.

Yet despite the commodity handicap, we're not growing like we should. Despite the massive credit growth, we're not growing.

So what happens when these handicaps disappear? We need to get our heads on straight here. Our expectations are completely out of whack.

My guess is Q3. I don't have a crystal ball. I've been wrong before. But it will happen. The sooner the better in my opinion.

Jonathan Tonge
www.americacanada.blogspot.com

Comments are open to the public. Please share your opinions, links and ideas with other readers.

A Little About Me

2010-01-14T11:54:00.000-05:00

Officially I started this blog in June 2009. So that really doesn't give you any history of my predictions. I was searching through my email yesterday and I found a couple informal emails sent to a close friend. Both were written in July of 2008 when oil peaked at over $140 a barrel and US Q2 GDP was reported at 3.8%. A little later in this post I reflect on democracy, capitalism and government. Please note that I'm not a financial adviser. The information below was a matter of opinion and not intended as financial advice:

Email sent July 24, 2008:

“Edmonton real estate sales are already falling at 24% annualized and this hasn’t even started. Vancouver, Victoria and Kelowna will crash even harder – especially in their detached residential sector. Victoria is currently falling at 7% a year, and Vancouver just flatlined and just started its fall at 3.6% annualized. In the coming months these annualized percentages will begin to accelerate, turning in some markets to 50 or 60%.

And as far as work goes, stay away from employment or investments in the banks. Keep your money out of shares in the financial sector. The world is about to go into a global credit meltdown as this real estate bubble is about to deflate internationally. Also, think of possibly investing in gold to hedge your risk.

From my research it shows that the Canadian government promoted 30, then 35, then 40 year amortizations, interest only loans, zero downs and allowing RRSP contributions to down payments just a month after the US housing bubble popped in the beginning of 2006. This allowed Canadian real estate to inflate to unheard of values even in the face of a real estate meltdown south of the border. So why did the Canadian government do this risking young people’s retirements, their savings and putting them in debt that for some will require bankruptcy of at least take over a decade to get out of?

Well I can only guess that the US knew right away that this was a bubble, not only when it popped but a year before, that it was going to create a global credit crisis since the real estate bubble was international. The leaders of all the countries may have possibly met and discussed this issue behind closed doors (have no evidence of this, but it would appear to be orchestrated with England, Australia, Japan, Spain, Canada, G8 etc.), about how they could soften the landing for residential real estate and the impact it would have on the worlds financial system which stands a chance right now of completely melting down. So they increased loose lending practices in the rest of the world while the US took the first big blow – thereby softening the landing for the world’s financial system which would go completely belly up if global real estate fell at the same time.

The Banks in the US won’t be able to survive this same issue around the world, as lending will dry up and interest rates will skyrocket, further adding to the number of defaults in the mortgage industry. This is bad news. Real estate may never approach the values you see today – possibly never again. The result of deflating assets may actually destroy the middle class in the industrialized world leading us to a depression not seen since the Great Depression. This is due to many factors including the income affect, whereby if you owe more than your worth, you stop spending on everything but the bare necessities of survival. This final blow to "wealth", which was merely created out of thin air by artificially inflating asset values, will be one of the big blows of comparable wealth between the east and the west industrialized nations."

I wonder if my hunch about the G8 trying to prevent a global meltdown was true? When I wrote this letter it would have sounded reminiscent of conspiracy theory, which I actively try not to subscribe to. But given the unprecedented cooperation amongst the G8 starting in October 2008, it would not be that hard to believe.

Sent July 21, 2008

* China has enough production capacity to make every product consumed by every person around the world. There is too much manufacturing capacity in the world. Manufacturing is about to go belly up.

* Both dot.com and the Real estate bubble were created by Alan Greenspan. The bubbles gave wealth, which meant people had something to borrow against. This allowed them to continue to spend. Now these people are bankrupt.

*This could quite possibly be the beginning of the end of the US empire. My guess is you will see them start to sell their resources and crown corporations in the next couple years. Believe it or not, but Washington is currently filled with lobbyists arguing for them to create the next bubble in order to save the American economy. What do you think it will be?

* America owes 44 trillion dollars. Including debts that will become due in the next ten years, that figure is 88 trillion. At the same time over 80 million Americans will retire in the next ten years putting that debt onto fewer tax payers, who by all measures will see their salaries drop. With the bubbles deflated, most of these Americans will have negative wealth going into retirement.

* America has no choice but to print more money."

I like the last prediction there. Ok Ok most of you are saying "duh".

Some other predictions:

By January of 2009 I was banking on a housing rebound. One only needed to look at a mortgage calculator to know what was about to happen (and that's exactly how I made the prediction). Canada's was too aggressive with their interest rate reductions - they did not let the market move into a more severe but necessary corrective phase. Therefore they dumped cheap money on a population who was still bullish on housing - a recipe for disaster.

In December of 2008 I explained to a Vice President at RBC Investments that in my opinion stocks had not hit bottom. He had been advising his clients to get in (not necessarily bad advice in hindsight). I told him that there were still severe issues with credit, trade was collapsing, that people were optimistic because of Obama, and that colder weather was on its way to the North East (where TSX and NYSE are based). Those factors were sure to weigh in on stock valuations. I explained to him that there would be a bottom within a few months and I was going to buy back in then.

I also informed him that the only stock I was interested in was Petro Canada since it was severely undervalued (at the time around $22 a share) and now that the Teacher's Pension Plan was involved, they were going to shake up the 'crown' style management. It's amazing how soft the teacher's expect taxpayers to be on them, yet when the ball is in their court and it is their money, they are amazingly ruthless. I think the VP took that advice to heart as he was really interested in hearing about it. Petro Canada ended up getting merged with Suncor in March, providing a 3 month return of 50%.

Believe it or not I ended up moving back into stocks the day the market bottomed (within hours). That probably was good luck. I didn't have the balls to stay in the market though and ended up selling about a week into the market rally. Honestly I didn't think the fundamentals supported it.

Enough bragging you say. True. But I made some good calls. More importantly I've learned some lessons.

Lessons:

Since then I've learned a great lesson. In a speculative market, don't take actions based on fundamentals. You take actions based on short term decisions. Everything is just a ponzi scheme so don't try to make sense of anything. Just don't be the last one in, or the last one out. Emotions rule. Reality is meaningless until the day the market corrects itself.

And of course this last paragraph sums up what I now write most often about. It's why lax monetary policy not only fails, but creates the problem in the first place. It's why capitalism is a victim of a fascist system. How dare it be blamed for the financial collapse.

Before I get further into this, it will help if I define what democracy is to me:

"A transparent system that fosters the freedom of each citizen, unborn and alive, to come to their own conclusions, and make choices how their resources are spent, have equal influence over their environment, and to be protected by laws that ensure honesty and fairness."

Capitalism thrives in democracy. Unfortunately we do not live in a democracy.

Our system works to make the citizen docile. They accept the world around them because they feel they have no influence. This allows special interest groups, most notably government, unions (especially government unions), corporations, minority groups, and crown businesses to lobby the government and take control.

The biggest threat to democracy is government itself. At one point in time, perhaps a couple centuries ago, this would have sounded like an oxymoron. Today most would accept that statement as true, however. Without the government, these special interest groups would have noone to lobby to, but well you. They'd have to earn their influence one citizen at a time.

Conclusion

If 2008 didn't prove how worthless money really is, then I'm sure we'll learn it soon enough. Real wealth is tangible. It can be described. It provides real benefits that improve our lifestyle. Capitalism, operating under good laws that enforce transparity, competition along with a non discriminatory minimal tax structure can provide the wealth that we seek.

Minimal government fosters democracy, which fosters honest capitalism. By keeping money in the taxpayers hands, we get to decide what is of value to us. We permit a level of wealth that encourages a lifestyle of recreation, time with family, the arts and music, and a passion for unique interests. Taxing people and then treating culture as a government affair is not democratic or effective. It in fact destroys culture.

None of this means turning our back on those that are incapable of providing for themselves or their families. But it does mean that we force those who are "capable" to make their own decisions and pave their own path. It also means that that those who are incapable are forced to go to their community for help, at least as a first resort, not some distant government. Decisions made by millions are far better than those made by a few men.

The actions the government has taken for the past thirty years, and for that matter since the Great Depression, has severely injured democracy. Whatever the casualties, we should not be scared to reclaim democracy. We should only be scared of slipping further away from that ideal.

Jonathan Tonge
www.americacanada.blogspot.com

Comments are open to the public. Please share your opinions, links and ideas with other readers.

12 Gloomy Forecasts

2010-01-06T23:02:00.000-05:00

"Norway" posted "12 Gloomy forecasts for the year(s) ahead" in the comments section of Mish's blog the other day. He didn't give credit to whom the original author was, but for now I'll assume it was him. It is a bit gloom and doom but nevertheless it's an interesting read:

12 Gloomy Forecasts

1. Faber: The 'American Empire' has peaked, is on a decline

Hong Kong economist Marc Faber says "the average life span of the world's greatest civilizations has been 200 years ... Once a society becomes successful it becomes arrogant, righteous, overconfident, corrupt, and decadent ... overspends ... costly wars ... wealth inequity and social tensions increase; and society enters a secular decline."

2. Grantham: Learned nothing, doomed to repeat past, only bigger

Money manager Jeremy Grantham warns that our irrational nightmare will repeat. A year ago we came dangerously close to the "Great Depression 2." Unfortunately, we've "learned nothing ... condemning ourselves to another serious financial crisis in the not too-distant future."

We had our bear-market rally. Next, historical cycles plus our irrational behavior guarantees another, bigger global meltdown. We "learned nothing."

3. Stiglitz: Wall Street creating short respite before next crash

Nobel economist Joseph Stiglitz recently warned: Unless Wall Street's incentive system is drastically reformed, "the financial sector will only try to circumvent whatever new regulations we put in place. We will simply have a short respite before the next crisis." Warning, nothing's changed, it's worse: Lobbyists run Obama, Congress and the Fed.

4. Johnson: Running out of time before Great Depression 2

Yes, "we're running out of time ... to prevent a true depression," warns former IMF chief economist Simon Johnson. The "financial industry has effectively captured our government" and is "blocking essential reform," and unless we break Wall Street's "stranglehold" we will be unable prevent the Great Depression 2.

5. Ferguson: Fed's easy money fuels new bubbles, meltdowns

In the 400-year history of the stock market "there has been a long succession of financial bubbles," says financial historian Niall Ferguson. Who's the culprit? The Fed: "Without easy credit creation a true bubble cannot occur. That is why so many bubbles have their origins in the sins of omission and commission of central banks."

Another bubble (and crash) is virtually certain, thanks to Washington's $23.7 trillion explosion in debt, the Fed's support for the $670 trillion shadow banking system and Wall Street lobbyists getting superrich thanks to Wall Street's insatiable greed.

6. Taleb: Fed haunted by ghost of Greenspan's failed Reaganomics

When Obama reappointed Bernanke, Nassim Taleb, risk-management professor and author of "The Black Swan," warned of a new disaster: "The world has never, never been as fragile," yet Obama reappoints an economist who "doesn't even know he doesn't understand how things work." New proof? At last week's American Economic Association, Bernanke was still shifting the blame: "The best response to the housing bubble would have been regulatory, not monetary."

Wrong: He conveniently forgets he was advising Bush earlier, did nothing. Now Obama's stuck with a Greenspan clone and an insane ideology focused solely on saving a failed banking system by flooding the world with inflated dollars guaranteed to trigger another meltdown.

7. Soros: Dollar dead as a reserve currency, nest eggs dying

Billionaire investor George Soros' "New Paradigm:" America's 25-year "superboom ... led to massive deregulation ... blindly chasing free markets ... unleashed excessive greed ... created the dot-com and credit meltdowns" and a "shadow banking system" of derivatives.

"The system is broken. The current crisis marks the end of an era of credit expansion based on the dollar as the international reserve currency," warns Soros. "We're now in a period of wealth destruction. It is going to be very hard to preserve your wealth in these circumstances."

8. Hedgers: make billions shorting stupid politicians, bankers

Soros isn't alone. Lots of hedge fund buddies made hundreds of millions and billions betting on the stupidity of Washington with the Fed's cheap-money policies. Alpha magazine reports that four hedgers made more than $1 billion each in 2008. The top-25 "managers made $464 million each on average last year ... a kingly sum, especially during a year of global recession, stock market wipeouts and vanishing wealth."

9. Shiller: Dot-com, subprime meltdowns, 'third episode' next

Economist Robert Shiller a "Dr. Doom?" Remember a decade ago with "Irrational Exuberance?" Now he's warning: "Bubbles are primarily social phenomena. Until we understand and address the psychology that fuels them, they're going to keep forming. We recently lived through two epidemics of excessive financial optimism, we are close to a third episode, only this one will spread irrational pessimism and distrust -- not exuberance."

10. Kaufman: Irrationality replaced reason, science, technology

Henry Kaufman was Salomon's chief economist and "Dr. Doom" for 24 years: "Why are we so poor at managing our key economic institutions while at the same time so accomplished in medicine, engineering and telecommunications? Why can we land men on the moon with pinpoint accuracy, yet fail to steer our economy away from the rocks? Why do our computers work so well, except when we use them to manage derivatives and hedge funds?"

Kaufman warns: "The computations were correct, but far too often the conclusions drawn from them were not." Why? Selfish, myopic politicians and bankers.

11. Biggs: Sell everything, buy guns, food, head for the hills

In his 2008 bestseller "Wealth, War and Wisdom" former Morgan Stanley research guru Barton Biggs warns us to prepare for a "breakdown of civilization ... Your safe haven must be self-sufficient and capable of growing some kind of food ... It should be well-stocked with seed, fertilizer, canned food, wine, medicine, clothes, etc ... A few rounds over the approaching brigands' heads would probably be a compelling persuader that there are easier farms to pillage." Biggs sounds like an anarchist militiaman.

12. Diamond: Nations ignore obvious till it's too late, then collapse

The end will be swift. In our age of short-term consumerism and instant gratification, few hear the warnings of our favorite evolutionary biologist, Jared Diamond. Societies fail because they're unprepared, will be in denial till it's too late: "Civilizations share a sharp curve of decline. Indeed, a society's demise may begin only a decade or two after it reaches its peak population, wealth and power."

The warnings were everywhere in 2008, but Greenspan, Bernanke and former Treasury Secretary Henry Paulson were in denial: It will happen again with Obama. Downstreaming problems will fail. Future bubbles get too big, crashes more deadly.

Jonathan Tonge
www.americacanada.blogspot.com

Comments are open to the public. Please share your opinions, links and ideas with other readers.

Home Sales Up 170% in Vancouver YOY

2010-01-06T13:46:00.000-05:00

The trusty economists say there is no bubble and lots of room for growth. From their track record of failure you'd expect people to be running to the hills. But they are not. Proving once again that nobody learned anything from 2008:

Globe and Mail commented on a BMO report that home sales are "stellar":

"It appears that the real estate market closed out 2009 on a strong note, ending a year that saw a short slump followed by a remarkable rebound. While national figures will not be released until mid-January, some regional numbers are being reported. And, BMO Nesbitt Burns noted this morning, the numbers are "stellar." Sales in Vancouver rose 172 per cent in December from a year earlier, and prices rose 16 per cent. Calgary reported a 77-per-cent jump and Edmonton 54 per cent. In the first half of the month, sales in Toronto were up more than 100 per cent from a year earlier."

Expect speculation, flipping and obsessive ponzi behavior to mark the coming year. It's not sustainable but it feels great while it's happening. It's exactly what the fed, BOC, Government of Canada,Washington, and about every other major organization in the world wanted. Just expect it all to crash in the near future and expect these self elected individuals to step up to the plate once again and make the exact same decisions that will end the exact same way.

Jonathan Tonge
www.americacanada.blogspot.com

Comments are open to the public. Please share your opinions, links and ideas with other readers.

Canada to Surpass the United States in Residential Mortgage Debt in Q2-3, 2010, Marked-to-Market

2010-01-05T12:02:00.000-05:00

According to Freddie Mac, the United States started off 2000 owing $5.5 trillion in residential mortgages and finished the decade with $11.8 trillion, a growth of 111% in ten years.

Canada on the other hand started 2000 off with $421 billion and ended the decade with $975 billion, an earth shattering growth of 132% in ten years.

Both countries have experienced similar economic growth and inflation rates over this period.

Total outstanding mortgages have historically been larger in the United States than in Canada due to higher incomes, a lower tax rate, increased purchasing power (PPP) and of course, the tax deductible nature of US mortgages.

According to the Conference Board of Canada, in 2008 Americans earned $6,400 or 20.2% more per person per year than Canadians. The income gap has doubled since 1984 as American incomes have risen much faster and Canada's productivity has fallen (we are now 25% less productive per worker than Americans). As a result, Canadians don't have anything close to the same carrying capacity for mortgages as our southern friends. So what is now unfolding may simply shock you:

United States Residential Mortgage Debt Per Capita

According to Freddie there is $11.8 trillion in mortgages outstanding in the United States. Based on that amount, a recent Reuters article from August 2009 estimated that the average American now owns approximately 8% of their home. In other words, 92% of the value of their homes is owed in their mortgages leaving a total equity of 1 trillion.

However the Milken institute estimates there is $10.6 trillion in outstanding residential mortgages in the United States. This figure is more commonly accepted than Freddie Mac's.

Both figures need to be marked-to-market to represent the true amount owed. It is estimated that of the $2.9 trillion in Alt-A's and ARM's, 41% or 1.2 trillion will default in the next two years. Furthermore, making up the remainder, prime and home equity lines of credit (HELOC's) have a delinquency rate of about 14% which should lead to a default rate of around 5%.

Using the above estimations and marking-to-market, the United States now has between $8.9-9.9 trillion in outstanding residential mortgages. For our argument below, we will average the range to come up with $9.4 trillion.

304 million Americans live in 110 million households (2006) in the United States and approximately 70% are homeowners. As such, that's an average debt of $122,078 per homeowner, $85,454 per household, or $30,921 per person.

Comparing to Canada

In Canada there is approximately $975 billion in mortgages outstanding. Current expectations believe that only 0.4% of these mortgages will default. That provides Canada with $971 billion of mortgages marked-to-market.

There is approximately 33,300,000 Canadians and according to the 2006 Census, they lived in 12,437,470 households. Like the United States, approximately 70% own their homes. That provides an estimated debt of $111,534 per home owner, $78,073 household, and $29,279 per person.

Some might immediately notice that the homeowners in the United States owe almost $10,500 more than Canada, where as per person the discrepancy is much smaller. I would attribute most of this gap to the way the US and Canada measures the number of households. The number of individuals per household in Canada and the United States is the same at 2.5 people. Therefore the per person figure is the most relevant (Americans owe $1,642 more person).

Closing the Gap

To surpass the US in per capita residential mortgage debt, Canada will need to rack up an additional $55 billion in debt. That should occur during the late second to early third quarter of 2010 as we surpass $1.0267 trillion.

As Canada's housing continues to go strong with record high prices and sales, our debt will continue to climb even in the face of a housing correction.

The Big Question

So the media was right afterall. Canada is different. We'll be much more in debt over housing than the US ever was. Yet due to the income gap, tax structure and PPP, Canada's real carrying capacity is at least 30% less.

So the big question on everyone's mind should be this:

"What happens when interest rates rise?"

US Residential Mortgage Report

Jonathan Tonge
www.americacanada.blogspot.com

Comments are open to the public. Please share your opinions, links and ideas with other readers.

Passing the $1 Trillion mark

2010-01-03T01:58:00.000-05:00

Congratulations Canada. It's very likely we'll have more than $1 trillion in mortgage debt outstanding by the end of Q1.

CMHC (Canada Mortgage and Housing Corporation - equivalent to the USA's Fannie and Freddie) published the December 2009 Housing Now report and provided an update on where Canadian mortgage debt stood at the end of the third quarter (July 1-Septemeber 31, 2009).

CMHC reports that there has been a dismal 6.7% year-over-year growth in mortgage debt. Sure it is about 5% higher than the CPI and about 11% higher than economic growth, but big deal. What is there to be worried about?

Well that 6.7% figure reflects the near absence of credit growth at the end of 2008 and beginning of 2009. The current rate of mortgage growth is between 10-13% (please continue reading).

NHA and Conventional Mortgage Loans Approved

As expected, Q2 of 2009 saw a record amount of NHA and conventional mortgage loans approved (see below). At nearly 75 billion, it beat the 2007 and 2008 Q2 approval records by about 10 billion. Approvals in Q2 translate into mortgages in Q3 and Q4.

Bank of Canada

The Bank of Canada estimates that by October 2009 total residential mortgage credit outstanding totaled $952 billion.

Mortgage Forecast

Many of the home sales made in the third quarter will close in the fourth and as such, the growth of mortgage credit should pick up speed. I expect we will close the year with roughly $970 billion in mortgage debt (+-0.5%).

Forecasting into the 1st quarter of 2010, we should continue to see the impact of record high home prices and sales signed in Q3/Q4. Many of these sales will close in Q1 2010 but will be balanced by the seasonally slow winter market. We should end Q1 2010 with between $980-1,000 billion.

Startling Credit Growth

What makes this mortgage credit growth rate startling is that new home sales are down. So while in 2008 and 2007 saw record new home sales, 2009 did not. Almost all of this mortgage debt wound up in existing residential.

This growth has led to price appreciations of up to 20% YOY in existing residential in major cities, even though the price of new home construction fell about 3%. This is a bubble and it will pop.

Jonathan Tonge
www.americacanada.blogspot.com

Comments are open to the public. Please share your opinions, links and ideas with other readers.

Jeff Rubin Calls Canadian Housing Bust (<-25%)

2009-12-23T13:27:00.000-05:00

Jeff Rubin, ex-chief economist from CIBC, calls for a housing bust. Real estate bears are reading "Just How Big of Mortgage Can You Carry?" from the Globe and Mail.

" Stress test your floating-rate mortgage three or four percentage points from today’s level and take a good, long look at the resulting increase in your monthly mortgage payment. For some homeowners, that could be as much as another $1000 per month.

Twenty years ago a similar shock to borrowing rates caused Canadian housing prices to fall by an unprecedented 25 per cent. I know because I called it.

That call was as much about where interest rates were going as it was about where housing prices were heading. Based on current borrowing rates, today’s homeowners will be facing almost as large an increase as they did back then.

So heed Governor Carney’s caution when you decide how big a mortgage you can really afford to carry.

Because once the Bank of Canada starts raising your mortgage rate, it will be a very long time before they stop."

Jonathan Tonge
www.americacanada.blogspot.com

Export Data Does NOT Add Weight to Recovery

2009-11-18T09:15:00.000-05:00

Canada's Exports

Exports are surging according to the latest media reports.

Please read Kevin Carmichael's report in The Globe and Mail that export data adds weight to recovery:

North American exports jumped in September, the latest indicators that a global economic recovery is taking hold.

Canadian exports of goods climbed 3.5 per cent from August to $30.2-billion, the third increase in four months, while in the United States, international sales of goods and services rose 2.9 per cent, the most this year, separate government reports showed Friday.

Canada's trade deficit was cut in half, as imports remained little change from August, Statistics Canada said. The U.S. trade deficit widened 18 per cent to $36.5-billion, the widest since January, as imports surged by the most in 16 years, swamping the increase in exports, the Commerce Department said in Washington.

Carmichael's report is extraordinarily suggestive. He fails to put the data into perspective.

After digesting that article, readers probably envisioned exports surging from their recessionary lows.

Here is the graph from Statistics Canada Canadian International Merchandise Trade report. The dark blue line represents exports.

You might immediately notice that although exports have increased three out of the last four months, they are still below the level they hit in July. In fact exports are well below the levels that existed before March 2009.

Although the trade deficit was cut in half in September, it was off the back of August's record shattering 2 billion deficit. September's result was the fourth largest monthly trade deficit in Canadian history.

Exports did grow in September but primarily due to dealer inventory replenishment after the now defunct cash-for-clunkers program.

In my opinion the latest export data does not add weight to a recovery.

Jonathan Tonge