Canada, once known mainly for its Mounties, maple leaves, and muscular peacekeeping presence…can now crow about how it managed to avoid the financial crisis that devastated many of the economies of the Western world. For instance, not one Canadian bank failed during the crash and only one reported a loss.
David Rosenberg, an economist for Gluskin Sheff, told Fortune this week he couldn’t “recall a time, ever, where on the fiscal, economic, or political basis, relative to the United States, the downside risks were as limited and upside potential so compelling in Canada as is the case today.”
All of this rings true, for now at least. But Canada still faces some stiff odds if it plans to slip through the crisis with nary a scratch. CIBC recently reported that Canada was likely to see its economic recovery squeezed next year, with a still-overvalued loonie falling to 93 U.S. cents and growth rates averaging “no better than 2% over the next few quarters.” Canada’s economy, said CIBC, was shifting “into a new phase of greater uncertainty.”
One problem is that it’s hard not to catch a close neighbour’s cold. Although bolstered by a heavy trade of natural resources, 75% of Canadian exports end up in the United States, so Canadian trade will likely suffer if American consumers don’t begin spending again. “At the end of the day, the Canadian economy just can’t fight the gravitational pull of sluggish U.S. activity. End of story,” Doug Porter, deputy chief economist at BMO Capital Markets recently wrote.
A U.S decelerating economy means the labour market (currently running at just under 8% unemployment) will probably soften further. Canadian household debt continues to rise and currently runs at about 144% of disposable income, comparable with rates in the US, although household debt is falling there. As with their American counterparts, debt-sodden Canadians could soon begin putting away those charge cards too.
A housing bubble?
But perhaps the greatest issue looming over Canada’s fortunes is its housing market, which has, despite a brief blip, continued to drive higher through the world’s economic snow bank due to easy credit, low interest rates and encouraging government tax breaks.
Believers in the Canadian miracle say the country’s housing market is not likely to have much of a correction at all, and certainly not the sort of housing swoon seen in the United States or Europe. One reason is that most mortgages were written by one of Canada’s six major banks, all of which have existed under tighter regulations than their brethren in the U.S. Another is that sub-prime mortgages were never in vogue. At the height of the American property bubble in 2006, sub-prime mortgages accounted for only 5% of the mortgages taken out in Canada, compared with 25% of those obtained in the United States. Roubini Global Economics says the chance of a “U.S.-style housing bust is unlikely given sound fundamentals of the Canadian financial system and mortgage lending.”
But the Canadian housing market is showing signs of strain. Driven by an overhang of supply and by recent government efforts to tighten lending standards, housing starts in October were down 9.2% compared with September, and down more than 12% in urban areas. Also, housing prices have begun to level off after a decade of scaling ever-greater heights. Over the last ten years, housing prices have increased more than 95% nationwide.
Lower housing prices could hit Canadians fairly hard. Housing accounts for more than 20% of Canada’s GDP, and its employment gains have been fueled by continued spending in the construction industry, which is one of Canada’s largest and fastest growing employment sectors. In October, while the number of workers in Canada’s massive service sector declined by 33,000, construction added 21,000 jobs.
There may also be less wiggle-room for Canadian homeowners than many perceive. Canadian banks didn’t slice and dice millions of sub-prime mortgages, but they still offered – and continue to offer — pretty generous terms. Edward Jones wrote in a recent note to clients that the mortgage credit in Canada increased more than 10% a year from 2006 to 2008, more than double the rate of growth from 1997 to 2001. Edward Jones added that “credit is currently more easily available than it was prior to the recent recession.” I disagree with this statement. I’m submersed in the qualification process on a daily basis. The ‘purse strings’ have tightened throughout the industry & it’s become quite evident.
Canadians easily obtained mortgages with only 5% down and payments running out 35 years. More than 65% of Canadian mortgages are fixed for five years (and now face more stringent renewal terms and likely higher interest payments). But variable rate mortgages offered in Canada were at least as creative as those doled out in the US, with banks allowing terms as short as six months. Unlike in the US, people who default on mortgages in Canada don’t just lose their houses; they risk other assets as well.
A fast or unexpected rise in interest rates (Canada was the first G7 country to begin moving them higher following the recession) could leave Canadians with little cushion. Last year the IMF noted that, by some measures, Canadians were paying a larger percentage of their income for housing than Americans did prior to the housing bust.
That level hasn’t improved. Recent government data shows that the average Canadian with a two-story home spends almost 50% of his household income on mortgage servicing, with the average is closer to 70% in red-hot markets like Vancouver. “By and large the affordability situation remains within a safe range in Canada; however there are local markets where the share of household income taken up by homeownership costs is at worrisome levels,” the Royal Bank of Canada wrote in September, adding that the situation in Vancouver raises “a red flag.”
#RealEstateForecast #EdmontonRealEstate #HomeBuyingPro #DwayneHorvath