Canada hikes rates, housing crashes

Via Bloomie:

The Bank of Canada forged ahead with another interest rate hike in a nod to the country’s surging economy, while signaling its appetite for further tightening may be curbed by a rising currency and sluggish price pressures.

Policy makers raised their benchmark rate 25 basis points to 1 percent, the second increase since July. At the same time, they cited risks including continued excess capacity, subdued wage and price pressures, geopolitics and the higher Canadian dollar, along with concern about the impact of rising interest rates on indebted households.

“Future monetary policy decisions are not predetermined and will be guided by incoming economic data and financial market developments as they inform the outlook for inflation,” the Bank of Canada said Wednesday in a statement from Ottawa.

And:

Average sales prices in Canada’s largest city continue to decline on a month-to-month basis, according to data released Wednesday from the Toronto Real Estate Board.

The board said the average sale price in the Greater Toronto Area was $732,292 in August, up three per cent from a year ago but down from the $746,218 average in July, 2017.

Prices continue to fall since the Ontario government introduced its 16-point plan to cool the housing market that included a province-wide expansion of rent control and a 15 per cent non-resident speculation tax. Average sale prices were $920,791 in April which includes almost three weeks of trade before new measures were effective.

National is sickening too:

Greater Fool says it all:

Imagine. The dollar nearing 82 cents. Toronto detached house prices now negative year/year. Three, four or even five rate increases by the end of 2018. (Update: Wednesday 10 am EDT – The Bank of Canada has raised its benchmark rate by a quarter point to 1%, effective immediately.)

The currency has swelled for a bunch of reasons, including gonzo growth based on reckless consumer spending, a weakening US buck as the drums of war beat, the latest climate change twins, Harvey & Irma, and the fact our central bank’s gone macho. Boss Stephen Poloz has switched from dove to hawk in a hurry. Six months ago nobody was anticipating any interest rate bump this year. Now we have two down with more in the oven.

By the end of 2018 bank economists (they know everything) say rates will be a full 1% higher. That puts the prime at almost 4%, HELOCs at 4.5%, personal lines at 6% and five-year fixed mortgages around 4%. Combined with the universal stress test requiring an extra 2% insurance, borrowers in late 2018 will be applying for home loans at an effective rate of 6%.

Renewers? Well, let’s see what protocol the banks adopt once the OSFI (regulator) guidelines are made clear. If real estate markets deteriorate after the rate hikes and rule changes take effect, it’ll be risk on for the Big Six. People who bought houses without a stress test and 2.3% mortgages could be in a for a shock if they’re offered less or to pony up some cash upon renewal.

Today’s rate hike was all the proof anyone needs our central bank has entered a new phase. A month ago the odds of a September increase were effectively zero. Credit for this is a 4.5% economic growth rate, which is twice that of the US and what you’d normally expect from an emerging market after a rainstorm. Ironically, a big part of that expansion came from the debt-snorfling and careless spending of the Canadian middle class which took place before the real estate gasbag started deflating in April. Almost nobody expects it to continue. However, the central bank is happy to leverage it into higher rates.

Why? Well, the big banks get better spreads since you can count on loan costs escalating a lot faster than the returns on savings accounts and GICs. Second, the central bank puts a little insurance under its best. If the economy lags in the future it has room to backpedal and throw some stimulus around. Right now, with its benchmark at just 0.75%, there’s precious little room on the downside.

Third, our guys want to keep up with the Americans, who have advanced rates three times in the last nine months. The yield on two-year Justin Bonds has risen weed-like in the past few weeks and now paces those of the US. Markets see our bank as being more aggressive than the Fed in 2018.

The result?

For the past three or four years crazed consumers and horny housebuyers have accounted for 90% of Canadian economic growth. They’ve financed that with more than $2 trillion in household debt. Astonishingly, new credit continues to expand at three times the rate of inflation. When people take loans to buy stuff they can’t afford with current dollars, they borrow against the future. Consumption from years yet to occur is moved into the present. It’s a bet that five years from now you’ll earn more, still be employed, and able to pay down what you took.

What a gamble.

Most of that debt – two-thirds of it – is in mortgages. Many were taken to acquire properties at their apex of value, when the cost of borrowing had never been lower. Now rates are rising with the assumption that house prices will fall. Add in the new borrowing test, and overall credit is expected to fade by about a fifth.

Oh, and did I ever mention taxes are going up for almost two million small business owners, entrepreneurs and professionals like doctors?

According to StatsCanada, almost 65% of the economy is now the result of people buying things, as opposed to making stuff or selling product beyond our borders. The bulk of that is residential real estate. Never have Canadians invested so much in a single asset class, nor borrowed so extremely to get it. Leverage is off the chart when you consider that the bulk of million-dollar house buyers in Toronto have debt-to-income ratios above 450%.

The last time our economy was this hooked on house porn? That’s right. Never.

So, up it is. Expect consequences.

The differences to here are stark. The Canadian economy is strong for now, with GDP above 4% annualised:

And income growing strongly after the oil shock dip:

Though if housing keeps falling all of that will change.

Lumbered by our income-shattered economy, covered over by a giant fiscal band aid, there is very little chance of the RBA following the BOC.

Comments

  1. What a fantastic piece of policy the 15% non resident speculator tax turned out to be. Luckily for Toronto they enacted it quickly before prices got too high and were high for too long.

    It appears to have completely taken the foreign bidcout of the market.

    If only local politicians had the guts to do something similar in Australia

    • Most local politicians and RBA board members own multiple investment properties.
      They are simply looking after themselves keeping the boom going.

      The best signal that the boom is about to end is RBA board members quietly disposing of their investments. This is the insider trading signal to watch…

    • It wasn’t the 15% tax. It was China slamming the door shut on foreign capital flight.

      The exit path to Canada was MUCH easier to slam shut – since – they have actual anti-money laundering laws and their major banks are not running some of the biggest cash laundering schemes on earth.

      The timing is exactly the moment China shut down the path way for HAM money as the Canadians call it (Hot Asian Money).

      Taxes were enacted in lots and lots of places with little impact – entirely removing the Chinese buyers on the hand will do it.

      • Canada also shut the foreign investment visa program about 2 years ago. That removed 52,000 applications from the Hong Kong office alone.

    • There is speculation that today’s WA Budget will include a foreign owner tax surcharge. At the same time an article two weeks ago says the number of foreign students coming to Perth has declined a lot. Is it a co-incidence that it coincides with the China crackdown on money flow. How many of these “students” were here to buy property. Will be interesting to see if the wa housing market is really going to recover next year like the spruukers keep saying.

      • No, I think its more that WA took itself out of the immigration visa rort – no point coming to study if you cant get PR afterwards. The same thing has happened here in NZ now that Labour/NZ First are cracking down on student post-study visas. At my local educational institution foreign student enrolments for 2018 have HALVED!

      • International students stopped coming because of the economy but the blame is being put on visa changes and RSMS changes.
        There was a 32% drop to the beginning of April 2017.

  2. It’s all in the eye of the beholder, but TO ME, those charts don’t say “crashing” they say “returning to a trend rate of growth”. You can draw a pretty-damn-straight line from 2013 to now on one graph and 2009 to now on the other.

    • People sitting on $200k in negative equity (and counting) might disagree with you Peach. Still another $150k just to return to your trend line.

      • You are looking at the “average” price. That suggests to me fewer houses are being at the top end, consistent with crackdown on foreign cash buyers. The benchmark index looks to be having a far milder correction so far.

      • Stop being pedantic. It is all relative, Dan.

        A correction is well underway, made more so by the regulatory environment in which it is happening.

      • Not at all being pedantic. Canada must be the only country in the world that uses an average house price. That is easily skewed by a few Chinese billionaires buying Vancouver mansions. Pretty much everywhere else in the world uses a median, or something more sophisticated.

      • Except that sales and listings data suggests this is not just a few isolated houses that are distorting the market.

      • But that chart is showing that the median price is still rising on a y-on-y basis. Difficult to tell whether its falling on a monthly basis, I would guess that it is, though not dramatically.

      • YoY changes trail MoM changes, so I think it’s fair to say that MoM is crashing if that’s what the YoY shows.

    • Rational RadicalMEMBER

      Keep dreaming Peachy. “Returning to trend”? LOLz. Have a look at what’s really going on, the fastest deceleration in price growth in recorded history for the Greater Toronto Area, home to 6 million people. The rate of the rate of change is what matters. Are you prepared to swoop in and catch this falling knife? I wouldn’t have guessed so. Well neither are the buyers and sellers now sending in armies of lawyers to escape with “only” losing their deposits, while the official figures continue to lag the reality on the ground for sales falling through:

      http://www.greaterfool.ca/2017/09/06/balanced/

      I’ve been LOLed at for 6 – 12 months for tracking the Canadian story as a serious indicator of how all insane housing bubbles invariably end – suddenly and in defiance of even the BullBears trapped in their central bank backed grey-sky thinking. How much longer are the laughs going to continue? Probably until Australia catches up to this very same reality, simultaneously arriving too late for MacroBusiness’ original predictions, and too early for their current predictions.

      Risk management is never about timing, it’s about terminal imbalances crushing confidence, liquidity and greed, and turning it into contagious terror and a giant credit sucking noise, invariably leading the economy into a credit crisis and deflationary depression in the fullness of time – thereby confirming that the “science” of identifying financial bubbles is always an endeavour rooted in moral obligation over pithy investment choices.

      The “Great Former-British-Colonies Commodity-Dependent Middle-Power Global Real Estate Bubble” (thanks!) is indeed the Global Real Estate Bubble 2.0, and is simply 10 years behind the US and EU in their private debt saturation and resulting debt deflation, which were in turn roughly 10 years behind Japan in the same.

      Are we really game to presume that Canada, New Zealand and Australia were ACTUALLY different to every other real estate bubble in history? The only way they were different was in matter of scale, and the resulting violence of the inevitable crash is necessarily worse by a similar matter of scale. Detached Toronto homes losing $100,000 per month, or 20% in 100 days is nearly unprecedented in global real estate bubbles, which have tended to take about 3 – 5 years to bottom.

      Canada is getting what they paid for, and Australia and New Zealand will follow in time, and perhaps already are, as subtle “lead” evidence such as finance falling through begin to seep into the news. Canada has proven (as if we didn’t already know) that price is the last indicator to move, especially when the figures are “official” sales statistics that are undermined by the unfolding disaster of failed deals. These failed deals are not usually “revised” into such figures, so by the time we have a newspaper headline declaring the “Real Estate Market Has Crashed, Sell NOW”, you’ve likely already missed 50%+ of the coming price falls – and the market liquidity has evaporated.

      Even H&H looks to be having a small “Return to Damascus” moment over the last week or two – spotting (and remembering?) the true fate of credit fuelled speculative asset bubbles: PANIC.

  3. reusachtigeMEMBER

    Greater Fool? LOLOLOLOL… Dude is just a share spruiker. Wants to divert people’s money out of the best investment class ever, housing, into his share plans. LOLOLOLOL!!!

    • Canada was yet another story of houses to the moon because of blah blah blah…..immigration, shortages, Chinese, fundamentals (remember BIG SHORT MOVIE- “American housing market is rock solid”?)

      • And now we get to test the other commonly espoused theories that house price correction = economic crash, also hiking rates = certain doom. Thanks BoC.

      • If/when the housing market sets off a liquidity crisis, then it will spread to the rest of the economy.

      • Well the Greater Fool seems to think the benefits of rate cuts will be the banks, that doesn’t seem to suggest a liquidity crisis is likely. And he fears that credit will fall by a fifth, but at the same time worries that “credit fueled growth” is bad.

        We have this situation here where APRA, RBA, and the government all assure us that lending standards are high, the banks well capitalized, borrowers are stress tested to much higher rates, have large equity cushions etc but refuse to canvas any action that might reduce house prices on the grounds it would crash the economy. In fact they are all just serving the interests of the property lobby, some unwittingly.

        Singapore is an example of a country that has engineered a fall in property prices without any broad economic fallout. It can be done. The risks rise if prices do *not* fall, and debt levels continue to climb.

      • True true.

        When people say housing bust = economic crash, they are effectively saying housing bust = banks folding = economic crash. If the banks are able to weather the storm, than there is less likely to be an economic crash. In bank risk management we must trust…

        There is also ancillary drag on the economy from falling construction activity, which can act as a feedback loop.

      • “There is also ancillary drag on the economy from falling construction activity, which can act as a feedback loop”

        The construction industry in Australia seems to be driven by underlying demand for housing rather than exponentially rising house prices e.g. it was quite healthy 3 years ago when prices were maybe 30% lower. Yes if you got to the point where liquidity dried up and banks were threatened you would start to get dangerous feedback loops. But for now we are assured, all is well, and yet we have extraordinarily, stimulatory policies applied to housing investment.

      • They may not be running the same level of immigration, but construction is always a given in a city like Toronto. Housing estates, new homes, condo’s. All those builders, tradesmen, labourers are going to see their hours slashed and/or lay-offs during a housing down turn. All the building and trade supply shops will also see the same. So on, so on.

      • Canada is a bit different to us in that they haven’t had a big construction boom and population growth hasn’t been nearly as high, Vancouver has barely gained at all in population over the last decade, some wealthier areas have even lost people (as locals cashed out and houses were left empty by Chinese investors. One big difference is that foreigners were allowed to buy existing houses, so they did, but didn’t necessarily emigrate.

        Australia’s financial system may be at low risk now actually because prices rose so fast. The average mortgage is still quite low because most of them were written before the latest price boom. But the longer we stay at these levels the more debt people will be forced to take on. I would argue it is a bigger risk to merely plateau than if prices were to fall 30% in Sydney and Melbourne.

      • From quote here:

        https://www.bloomberg.com/news/articles/2017-02-10/vancouver-s-empty-mansions-highlight-middle-class-housing-woes
        “The number of residents on Vancouver’s west side — long favored by families and an easy commute to downtown — has fallen 3 percent since 2001, in contrast to 5 percent growth in population across the whole city, Yan said. ”

        But either way population growth has been nothing like Sydney and Melbourne, neither has construction.

    • I gotta say its weird to hear someone complain that GDP growth is all consumption driven. Here we complain that its just about everything else, e.g. its all government spending, or a “temporary” bump in exports, or investment in “non-productive” assets, or inventory build etc. So just what is the “good” type of GDP growth?

  4. FiftiesFibroShack

    That’s how it’s done. Nice big tax on foreign buyers and some rate rises = game over for a housing bubble.

    • As per my comment above

      It wasn’t the 15% tax. It was China slamming the door shut on foreign capital flight.

      The exit path to Canada was MUCH easier to slam shut – since – they have actual anti-money laundering laws and their major banks are not running some of the biggest cash laundering schemes on earth.

      The timing is exactly the moment China shut down the path way for HAM money as the Canadians call it (Hot Asian Money).

      Taxes were enacted in lots and lots of places with little impact – entirely removing the Chinese buyers on the hand will do it.

      • FiftiesFibroShack

        That could well be correct, I don’t know anything about capital flows out of China. And there’s no question our money laundering laws are pathetic.

  5. If only we would hike rates based on assett inflation and not some basket of goods nobody gives a shit about.

    • Jumping jack flash

      This.

      A lot of work goes into carefully engineering the CPI baskets and weightings to produce a result within the expected range every time. You just have to look at them to see how much. Its truly a work of art and genius.

  6. As Garth says, Canada is using the GDP numbers as a cover to normalize. Think that would ever happen in this shithole?

  7. Tassie TomMEMBER

    This is really interesting. Please keep informed on this evolving story.

    So far, only the few people who bought in the last 12 months are underwater. The rest who bought before last summer’s crazy blow-off are still “ahead”.

    Not many people would have had their loans called in yet, and the banks wouldn’t have experienced much in the way of write-offs yet. The ability of banks to write new loans probably hasn’t been crimped too badly yet either.

    However, market sentiment has surely been smashed. There are still probably many in disbelief or denial, and who are hanging on to their “never can lose on property” sentiment. So market sentiment probably hasn’t completely turned yet, but it is certainly being challenged. I’m sure the “get in while you’ve still got a chance or you’ll miss out forever” mentality is less ferocious than it was 6 months ago.

    Toronto’s prices have gone down $190K – another $130K and everyone who has bought in the last 3 years is underwater – some by $50K, some by $300K. If it gets to this then all bets are off, and welcome to the downward spiral! This could be big enough to seize international money markets.

    • The next nail in the coffin will be the stress testing for borrowers. See Garths blog for details.

    • I’m heading back to Toronto in 10 days for a month to visit family and friends.
      I am looking forward to gauging sentiment, last time I was there they were all pretty cocky.
      I might have to keep my mouth shut this time.

      • Rupert – next time MB does a story on Canadian property, please contribute a comment about your experience of the sentiment on the ground in Toronto. I’ll be keeping a close eye out for it.

        It may be a less-than-50% probability, but this Toronto story could potentially be the beginning of the biggest economic event in Australia since 1891.

        Thanks. Cheers.

  8. Why haven’t interest only loans been banned? Why haven’t foreign investors been taxed more. Why hasn’t negetive gearing been capped? Why, why, why’s?

  9. I literally do not believe this shit.
    I do not believe it.

    As long as their dipshit government (like ours and NZ) will open their cheap whore hands and take any Yuan they can get their hands on (ie: immense Chinese immigration) then why the fuck would this slow down?

    You think 900k CAD to 700k is going to happen? All the Chinese see is a 200k saving.
    Bullshit, I need to see (significantly) more data and policies to believe this.

    There’s a billion of them and over there in Canada? without negative gearing? They’re even more influential than the problem here.
    Locusts gotta loc.

    • Around the same time, China started enacting stronger currency controls. I know people who tried to get big money out of China. It was a slow process and I don’t know how much it ended up costing. They’d done it in earlier years without issue. There might be plenty of Yuan out there, but China wants it for domestic consumption/investment.