If you think Canada is screwed, spare a thought for Australia!

Last night Canada hikes interest rates into its increasingly troubled housing correction as growth motors along nicely. Zero Hedge used a few charts from Deutsche to declare “Canada is in trouble”:

Some time ago, Deutsche Bank’s chief international economist, Torsten Slok, presented several charts which showed that Canada is in serious trouble” mostly as a result of its overreliance on its frothy, bubbly housing sector, but also due to the fact that unlike the US, the average household had failed to reduce its debt load in time.

Using those four measures, you decide who is in trouble:

  • Canadian household debt to income is 150% versus Australia’s 190%;
  • Canada’s 7% of worker’s in dwelling construction versus 9% Aussie workers in construction though it’s debatable how many are in dwellings;
  • Canadian average hourly earnings are growing 1.5% versus Australia’s average compensation falling outright in nominal terms, and
  • Canadian real house price growth since 1975 at 200% versus Australia’s 230%.

One more thing. Canada is much less dependent upon external financing that Australia with a much more diversified economy and export mix. Australia has less public debt but given it guarantees all of that offshore debt it’s probably more useless.

You may not accept the premise of the argument that Canada is in trouble but if you do then Australia is screwed!

Comments

  1. There is no doubt Australia is screwed but it is taking forever to reach its tipping point!

    • We need a Home Capital moment. Not sure who our weakest lender is. Bendigo seemed to have some very ‘creative’ products on offer, if the other minor league lenders were partaking in similar lending, then it’s only a matter of time.

      • If you can guess this right, you can make tons of money. On the other hand, a Home Capital moment, aka Bear Stearns moment, is merely a prelude to what is to come.

      • ABC News article posted on FB titled “Meet the mum whose rent is 70 per cent of her income. She’s not alone.”

        Check out these comments:
        ” I think you would find most people’s Mortgage repayments would / is 70% of there wages. And then they have land rates, water rates etc on top.”

        “Tell me bout it….its hard to find cheap rent any where….I live in a small country town and pay nearly $300 a week”

        “There was news that people are “bidding” on rents. Housing expects up to 50% of household income to go to rent.”

        “Mine was 75% before I got employed again. For three months I ate charity food and was so stressed and scared. Bills built up and I’ll not have a chance to catch up trying to apply for long term hardship on loans. It’s not easy no parent on Newstart is living it up. Unemployed parents are not bludgers they are struggling to keep it together.”

        “Welcome to the future. Anyone under 40 who doesn’t own a home when they retire will be in the same boat, paying rent to their Chinese overloards and having to move back in with their friends in order to be able to afford food and electricity.”

        The rage is building. People accepting 70% of their income going to a mortgage as normal? They must be some seriously dodgy loans, too.

    • Yep, and I don’t believe you will see much in 2017 – I think a -1-3% decline nationally for property. It won’t be headline stuff in the property market but I think by the end of the year we could be in a technical recession of 2 consecutive quarters of negative growth but it will only be the start.
      2018 is when all of the car manufacturing will be gone, when building starts will drop off a cliff and apartment completions peak, and November is when China has it’s party reshuffle. It’s going around that Xi wants to hold on till November after which tighter financial reforms will come.
      My view is 2017 is the flattening year of GDP and property prices but 2018 both will turn down fairly significantly.

      • One hopes. It is becoming increasingly difficult to rent with kids growing up and your partner wondering if it is all in your head.

      • Yep. It’s a once in a lifetime boom from China where they came from the dirt, millions dying of starvation and they literally rebuilt the country over 30 years. This has had a massive impact on the Asian region and won’t end in a day, but it will end. People think this is the new normal – it’s not.

      • Andrew it’s also the notorious Chinese propensity to gamble and speculate. This is not just because they are new to capitalism. This creates bubbles and they will disappear fast as it deflates. There will be volatility.

  2. Abso-fucking-lutely!

    Equally important, all the same justifications are/were at play:
    – Foreign buyers
    – Supply & Demand
    – Record low interest rates; will never go up
    – Most desirable liveable place on the planet
    – Vancouver/Toronto are world class cities
    – housing only goes up
    – Canada’s different
    – whatever other cockamamie logic is used to justify record debt levels

    Just waiting for another lender to be caught with their pants around their ankles off the back of Toronto.

    • GunnamattaMEMBER

      I find this analysis misses a fair bit of the political economy comparison between the two colonies……

      There is a lot of cretinous behaviour in Canadian politics and although he has done some stuff OK I am suspicious of Justin.

      But when you compare that two mainstream sides of Australian politics with their trousers dropped and cash (from anyone – from poker machine lobby to foreign state owned enterprises, to non tax paying consumer gougers in the gas export sector) fluttering from every orifice then you would have to come to the conclusion the Canadians have us

      • Gunna, you’re certainly right.

        Though I was referring to the psychology of your average pleb & how they justify buying into such madness.

        There was an eye opening moment a few years back when I read an article on the crazy new heights Vancouver was reaching. The comments section was a word for word clone of any similar article about Sydney/Melbourne. All the same ‘rationale’ and ‘logic’ on why *insert city/nation* was different. They all seemingly revolved around the above.

    • Brenton, all assets bubble up because of excessive “demand”. Except it is not normal demand for goods and services, but SPECULATIVE demand. When that demand eventually evaporates…….. you know the rest, don’t you?
      That’s how all the property spivs fool the idiots of this world, ah?

    • Who wants to go to Canada? it’s freaking cold there, and their housing prices should not have gone up in the first place!!!

      • I did exactly that. Left Sydney last year for Toronto via a intra-company transfer. Trying to raise a family in Sydney and put a roof over your head is tough unless you’re prepared to leverage to the eyeballs. Toronto is expensive but there are more housing options here than in Sydney. GTA is expensive but you can move to the exburbs and find 3-4 bedroom townhouses for between 600-700k. Yes some days in winter can be a pain but it’s aint that bad. Apart from housing being cheaper (compared to Sydney), healthcare is better quality and cheaper (employer paid private health insurance covers almost 100% of dentist, doctor and prescription meds), daycare (Montessori school) about 25% what I would have paid in Sydney, cars and petrol cheaper, public transport cheaper, utilites cheaper, clothing cheaper (and better quality) … I could go on. With the BoC hiking, I hope now housing gets cheaper. I am an Aus citizen. Wasn’t easy to leave but became necessary. Best advice I can give to those who are mobile …. leave and return only when pollies and the government begin putting citizens first.

  3. proofreadersMEMBER

    “You may not accept the premise of the argument that Canada is trouble but if you do then you then Australia is screwed.”

    Nah – Straya is different. We have reusa and his beautiful relations. Canada eat your heart out.

    • The difference is the Australian government is committed to support the bubble not matter what.

      • no Dumpling, I don’t know. Would probably take someone from the Canuck version of MB, who has been paying attention to economic and government forces in Canada for several years to provide decent insight.

        One explanation is that it may be the change in government, from their LNP equivalent (I remember their last prime minister was a tony abbott clone (or vice-versa)), but can’t say for certain.

        Interesting to observe though that the change in attitude (from blowing to popping) has occurred at both the city, provincial and commonwealth levels of government in Canada.

      • “the change in attitude (from blowing to popping) has occurred at both the city, provincial and commonwealth levels of government in Canada”

        That is a very interesting and likely significant point. Assuming that the election cycles of these 3 levels do not match (I am not familiar with the Canadian system), such a simultaneous switch can only occur due to forces outside of politics. One possibility is that all three levels of governments received a memo from the Canadian banking syndicate.

        Quite similar to what is happening now here in Australia – all the banks suddenly wish to reduce their exposure to high LVR loans and IO loans. It just shows who is governing the country.

      • dumpling, are not our banks reducing their exposure because of directives from APRA, not by choice?

      • Dennis, APRA is just providing a cover so that the banks can reduce their exposure with minimum public outcry. I don’t believe that APRA would impose any measures against the collective wishes of the banks. I mean, if it were truly against the banks I would expect to hear a lot of noises and lobbying against APRA. It is not as if the banks are in short of public campaign slogans along the lines of “APRA’s latest directive is against the hard working mums & dads who are doing it tough”

      • Even StevenMEMBER

        @dumpling

        I really like your comments on this forum, but on this particular point you need to apply Occam’s Razor.

  4. The true question is what industry will thrive in post RE apocalypse Australia.
    Investing into that field, even if it is 10yrs too early, will get a front row seat.

  5. Devil’s Advocate: Canada’s issues became symptomatic when they cracked down on the same issues that also riddle Australia’s economy. I can’t blame pollies for trying to keep the one economic activity left going. This behaviour does not necessarily make them evil.

    I do blame them for sabotaging any attempt for development of economic activities outside the inner circle of rentseeking friends and the complete lack of long-term vision. This behaviour makes them evil.

    • BubbleyMEMBER

      Devils Advocate Mark #2.

      Canada has the advantage of shaing a long border with the America. Any drop in their currency sends the Yanks over the border to buy products at a discounted rate. Right now its trading at $1 USD to $1.27 CAD. Plenty of Americans will cross the border to get a 25% discount.

      Lumber and energy will be more affordable and ski holidays are cheaper too, which is good for tourism.

      Because of Canada’s proximity to a major trading force like the US, it will always do better than Oz in any form of down turn. I’m not saying that they wont go to hell economically at some point but they will do better than Australia if it happens.

  6. reusachtigeMEMBER

    Nah, our housing is much more popular than the Canadans as we have beaches and an enviable lifestyle with good looking property investors. It’s all good, stop being negative normans!

  7. But canadia does not have our secret weapon. A RBA co opted to the interests of the party in government instead of doing thier job. Combine that with the overwhelming majority of politicans greedily waiting for thier pay day from corporate thieves or China then you see how much longer and longer we need to wait for the tipping point to reach here.

  8. For the last year or two now we’ve observed Canada’s housing bubble lead the way, with Australia noted by many (yours truly included) to likely be 6 – 12 months behind Canada in terms of inverting political, regulatory, and market pressures, including notably – foreign capital inflows.

    Folks like me regularly posted links to Garth Turner’s blog, who explains so eloquently the phenomenon of bubble psychology, liquidity, the marginal buyer principle, the inverse relationship between mortgage rates and house prices etc etc. His repeated claim that the human emotion of greed turning to fear and loathing is the fundamental quality and death-knell of all asset bubbles has so far proven to be rock-solid.

    I’ve also been putting forward such a contention for the last 3 years – and claimed that a lack of *imminence* is irrelevant in the face of *inevitability*, precisely because human bubble psychology will ensure that ultimately panic with a capital P will destroy all moderate or circumspect predictions about the ultimate corrections or crash.

    We must not judge the prescience of the true “bears” based on the timing of the ultimate bust – but rather on whether or not it causes crisis, and destroys the speculative urge for years to come. As I’ve said before, it would be good to see some of MB’s quality analysis directed at the phenomena of bubble tipping points, the marginal buyer, market liquidity, etc.

    While predicting exactly what happens next is always going to be a mugs game, Canada is once again proving what bulls and bears alike keep forgetting – all bubbles destroy themselves in time, and fallible humans always trump efforts by corrupt and incompetent central bankers, governments and associated market manipulators to prevent the inevitable.

    Many folks have even come to believe that central bankers will not do anything to punish asset holders, especially in the midst of a correction…. Yeah, right…. History and current experience is not your friend in that regard. Don’t say you weren’t warned. And make sure you sign up to Garth’s blog. I’ve never lived so vicariously in my life:

    http://www.greaterfool.ca/2017/07/07/market-update-11/

    • reusachtigeMEMBER

      LOLOLOL… Another fool sucked in by that share spruiker!! His blog is named for the people that read it then hand over their money for some equities.

    • Cracking comment!

      Even got a Reusa retort, that’s like a gold star sticker of approval.

    • Our bubble is like a terminally ill cancer patient – its fate has long been sealed but the doctor cannot pronounce the patient dead yet.

      • The patient has been comatose for years but the doctor refuses to pull the plug, arguing that some soon-to-be-discovered miracle drug will bring cure the patient. Meanwhile the expenses keep increasing and the family is beginning to wonder if the doctor has an interest in milking the would-be corpse.

    • codeazureMEMBER

      “a lack of *imminence* is irrelevant in the face of *inevitability*” – nice way of putting it, must remember that. But with (most) people who are investing like driving with the rear vision mirrors, they still don’t see it. Going to have to wait for the airbag to go off in their face, like Toronto is experiencing now for them to realise.

    • SoMPLSBoyMEMBER

      Great post Radical!
      Especially your observation:
      “such a contention for the last 3 years – and claimed that a lack of *imminence* is irrelevant in the face of *inevitability*, precisely because human bubble psychology will ensure that ultimately panic with a capital P will destroy all moderate or circumspect predictions about the ultimate corrections or crash.”

      Lately, been chewing on the ‘way’ the RE story has been told and re-told and smack dab in the centre of all celebratory ‘features’ (print, audio, video) is the ‘wonderful’, ‘marvellous’ ME who WILL be considered, smart, canny, good-looking ( and tall) funny and by all counts, an A- grader who was destined for greatness and therefore entirely deserved.

      This clever approach leaves aside and ignores ( deliberately) the connection between ‘ME’ ( individual) and the success/ failure of the adjacent society one is connected to which really cannot be separated. Yet another manifestation of the great Strayan duality; lifter / leaner; winner / loser; renter / owner; tinny / stubby; the list is endless and the key ‘teaching’ in all of this revolves around the requirement to promote division.

      The narrative everywhere is shaped to a hierarchy of superior ‘winners’ all the way down the broad strata where most exist and then to the abject losers. It’s pretty hard to generate interest or action amongst the society when the ‘way’ the story has been told ignores so many important things that do matter. I expect no change in the ‘story’ until an economic re-set forces the contemplation. The way of nature / things is cyclical and change always comes-usually at the right time.

  9. We should not follow Canada’s lead. We should lower teh rates or maintain our record low rates forever. That way, it will ensure that our debt-to-income ratios keep increasing, our dependence on on sector does too, and our wages keep falling because of falling productivity from capital mis-allocations.

    Lower teh rates!!!! We’re leading the world.

  10. I wonder what would have happened if the government of the day hadnt supported our banks 10 years ago during the GFC? Would we have had short term pain for long term gain?

  11. Yet the CAD rises to new highs. The idea that recognition of a housing bubble will cause the AUD to fall is not being borne out in Canada.

  12. Hang on, I’m not being obtuse on purpose I just haven’t seen any charts in the last month or so but last I saw prices in BC were “crashing” to new heights? Are prices actually going down now?

    • BrentonMEMBER

      Refers to Toronto, that has seen prices drop from a high of $920,791 in April, down to a current $793,915 (around a 15% drop in just 3 months)

      Also, there has been a massive increase in listings and a decrease in sales (everyone selling, no one buying).

      Now we have an interest rate hike to throw into the mix.

  13. SwittersMEMBER

    If I’m not mistaken Canadians tend to favor fixed rate mortgages rather than the much more dangerous variable rate mortgages. I mean, who would take out a 30 year variable rate mortgage when interest rates are the lowest they’ve been in several centuries? That’s just pissing into the wind.

  14. So what happens if a bunch of disgruntled renters set fire to the empty rentals in their neighbourhoods? That’s what will happen won’t it?

  15. SoMPLSBoyMEMBER

    Good stuff from M North at DFA.
    BEAR ( Banking Exec Accountability Reform)
    Many ‘ interested’ Senior Exec’s heart rate just ‘spiked’.

    Just in time I reckon. Should be easier to place the boot on those notoriously hard to pin rat-tails that have contributed to the property value mess. Their time has come.

    http://www.digitalfinanceanalytics.com/blog/the-bear-roars/