Briefing highlights
- Banks could handle debt bust: DBRS
- OPEC officials meet on deal
Banks could handle debt bust
Canada’s banks should be able to handle whatever the consumer debt binge can throw at them.
Some people, though, perhaps not so much.
Like other observers, Canadian credit rating agency DBRS says the country’s big banks could weather a severe housing correction. And for the record, it sees a slowdown, not a bust.
“Such a downturn would be more likely to occur if there is a significant slowdown in the overall economy and a material unemployment shock, particularly in these metro areas,” DBRS said in a new report, referring to the Greater Toronto and Greater Vancouver areas, Calgary and Montreal.
“Rising interest rates could also lead to a downturn in the housing markets and a slowdown in the economy,” the agency added.
“Irrespective, an increasing rate environment should constrain debt repayment capacity for certain borrowers. Nonetheless, in the event of a housing market correction, the banks in Canada appear to be positioned to absorb a higher level of provisioning for home lending that might result.”
That’s where the commercial banks are concerned.
Like the Bank of Canada and other groups, there’s rising angst about the vulnerability of certain Canadian families in the event of any shock.
“One indicator of the stress on home buyers from rising house prices is the high level and continued increases in the proportion of all insured mortgages that have loan-to-income ratios (LTIs) above 450 per cent,” DBRS said.
“The proportion of these high LTIs has been rising across all metro areas in Canada, particularly in the GTA and GVA,” it added.
“The decline in interest rates is also a factor driving up LTIs, as lower mortgage rates permit home buyers to afford larger loans for any given level of mortgage rates.”
Of course, Finance Minister Bill Morneau has just brought in a series of measures aimed at dealing with inflated home prices and swelling household debt.
“DBRS perceives that home buyers in the last two to three years and marginal borrowers, generally, are most at risk from a correction in house prices, particularly if economic growth was to falter or interest rates were to rise rapidly,” the agency said.
“The GVA appears to be the housing market that is most at risk from a potential downturn in house prices, with a lower downside risk attached to the GTA.”
It’s true that the Bank of Canada isn’t expected to go anywhere anytime soon where interest rates are concerned. But higher long-term rates expected in the United States are expected to ripple into Canada.
It’s also true that Canada’s current elevated jobless rate isn’t forecast to ease by much in the next couple of years. Nor are incomes projected to rise markedly.
“The weakness in labour markets will keep wage growth contained,” the Conference Board of Canada said this week, noting annual pay gains of a “paltry” 1.3 per cent in September.
“We expect average wage increases of just 2.3 per cent this year followed by a slightly stronger 2.5 per cent in 2017.”
OPEC officials meet
Officials of OPEC and non-OPEC oil producers are meeting in Vienna to negotiate production quotas.
This follows the output agreement struck last month, with details to be made final in November.
“Oil prices have continued their see-saw price action this week as traders weigh up whether OPEC and non-OPEC members will be able to implement the deal thrashed out in Algiers at the end of September,” said CMC Markets chief analyst Michael Hewson.
“Prices had been on the decline after Iraq became the latest country to argue it should be exempted from the freeze, given its fight with IS in the north of the country. Yesterday’s rebound appears to have been predicated on reports that Saudi Arabia, along with some others, might be willing to cut its output by up to 4 per cent.”
Prices are slipping so far, however.
Royal Bank of Canada analysts believe OPEC will stick to a deal.
“It is imperative that OPEC and Saudi Arabia, in particular, live up to the guidance it recently signaled for several reasons,” said Helima Croft, head of commodity strategy, and her colleagues, commodity strategists Michael Tran and Christopher Louney.
“Not only will the lack of follow-through solidify the view among market participants that OPEC is defunct, but a significant amount of fresh longs and short covering has occurred over recent weeks,” they said in a recent report.
“Failure to launch will undoubtedly send the market reeling back into the low $40/barrel price environment (or lower). More importantly, a significant amount of U.S. producer hedging has taken place as term prices have trended into the low- to mid-$50/barrel range. Shoring up hedge ratios simply means that U.S. production becomes increasingly price agnostic and will grow from current levels, thus potentially overwhelming an already fragile market.”