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For Sale sign in front yard of house (Brand X Pictures/Getty Images/Brand X)
For Sale sign in front yard of house (Brand X Pictures/Getty Images/Brand X)

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Could you survive a 40% plunge in house values? Add to ...

These are stories Report on Business is following Thursday, May 24, 2012. Get the top business stories through the day on BlackBerry or iPhone by bookmarking our mobile-friendly webpage.

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Debt a concern DBRS Ltd. is highlighting a somewhat shocking number today. The ratings agency isn't saying it's going to happen - not for a moment - but it does say Canada could withstand a plunge in house prices of 40 per cent.

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That's a dangerous number, but the DBRS study says it wouldn't put most Canadians under.

"A catastrophic 40-per-cent property value drop would reduce household net worth by $93,000 and lower the average equity ratio to 44.8 per cent from the current 66.9 per cent, but would be unlikely to cause immediate, large universal mortgage defaults," says the study, whose lead author is Kevin Chiang, a senior vice-president.

There is no timeline for that.

That doesn't mean DBRS isn't concerned about the mounting debt burden among Canadian families, and what it sees as "stretched" housing affordability. Other observers have also sounded warnings.

Household debt, it finds, ballooned by more than 381 per cent between 1990 and 2011, to $1.6-trillion, while average home prices reached almost five times average gross income.

"While housing prices increased faster than the average household income, the current affordability ratio of 37 per cent is aided by the low interest rate environment and is only slightly worse than the long-term average," the report says, though it notes that an increase of 2 per cent in mortgage rates could drive that to 43 per cent, or more, of pre-tax income.

"An increase in mortgage rates or a home price correction in itself, in DBRS’s opinion, does not have a large impact on mortgage defaults," according to the study.

"However, a combination of higher interest rates, lower property values and a drastic increase in unemployment would be of great concern as mortgage defaults are closely related to employment and individual family situations. Higher interest rates would likely cause some households to reduce consumption and fewer people would qualify for the same mortgage amount, putting downward pressure on housing prices."

As Europe burns ... Europe's leaders appear unable to gain even the slightest bit of traction as their economies crumble around them.

Yet again yesterday, the chiefs of the European Union accomplished nothing at an informal summit, other than make encouraging noise about how they want Greece to remain in the euro zone. Any hard decisions have again been pushed down the road, to a June 29 summit in Brussels at the earliest.

But as they dither, the economic outlook continues to deteriorate. Fresh readings today on the manufacturing and services sectors of the 17-member monetary union showed continued contraction. A composite purchasing managers index slipped this month to 45.9 from 46.7 in April.

That marks the ninth consecutive month for a reading below 50, which separates expansion for contraction. It's also the lowest reading since the summer of 2009.

What's worse, the manufacturing reading from Germany alone showed faster-than-expected contraction. At the same time, a widely watched reading of business confidence declined for the first time in several months.

The failure of the EU summit to do anything substantial has left a sour mood, adding to the uncertainty surrounding the mid-June election in Greece.

"While Greece remains a running sore, investors will be unwilling to place their faith in EU politicians unless they can come up with a credible plan to deal with the unfolding crisis within Europe," warned senior analyst Michael Hewson of CMC Markets in London.

"While all the uncertainty over a Greece exit remains, the country is likely to remain uninvestable as Greek citizens slowly empty their bank accounts and withhold their taxes over uncertainty surrounding the country’s future," he said in a research note.

"Last night’s decision by EU leaders to put off any proposed action until next month’s June summit, with respect to dealing with the problems afflicting Europe’s banking sector, illustrates the paralysis at the heart of Europe’s policy making machinery, and also the divisions as to what any next steps would be to restore investors' fragile confidence."

China slides The numbers from Beijing today aren't much better.

A purchasing managers index for China showed manufacturing slipping for the seventh consecutive month, to 48.7 from 49.3, a reading that has prompted speculation of more stimulus from authorities, Carolynne Wheeler writes from Beijing.

"We must proactively take policies and measures to expand demand and to create a favourable policy environment for stable and relatively fast economic growth," the Chinese government said on its website today after a State Council meeting.

Economists at Capital Economics believe, however, that these measures will rebound soon.

"We believe that GDP growth dropped to 7.1 per cent year-over-year last month," Mark Williams and Qinwei Wang said in a research note.

"We are however optimistic that recent policy moves, from monetary easing to the speeding up of approvals for infrastructure projects, will start to revive the economy in the next few months," they added. "We expect stronger PMI readings in June and July."

Shareholders kill bonus Shareholders have killed a plan by Astral Media Inc. to give its outgoing CEO a $25-million thank-you payment as part of the company’s merger with BCE Inc.

A lack of shareholder support prompted Astral to pull the proposal, The Globe and Mail's Steve Ladurantaye writes.

While Astral investors overwhelming approved the $3-billion deal, which will see BCE inherit content it sees as necessary to increase its foothold in Quebec, the company also asked the shareholders to approve the bonus package for CEO Ian Greenberg.

Regulatory filings had said the purpose of the payout was to compensate him for building the company and because he would forgo future income with the sale.

RBC profit slips Royal Bank of Canada posted a 7-per-cent dip in second-quarter profit, driven by a $202-million loss it took on the buyout of RBC Dexia Investor Services from its partner in April.

Canada’s biggest bank earned $1.56-billion, or $1.01 a share, on continuing operations in the quarter, which was slightly lower than what analysts were expecting, The Globe and Mail's Grant Robertson reports.

That compared to net income of $1.68-billion, or $1.10 a share a year earlier.

Not including the loss RBC took on its purchase of the 50 per cent of RBC Dexia it did not already own, the bank earned $1.77-billion on continuing operations in the second-quarter, up 5 per cent compared to the year before.

“At a first glance, we would characterize the results as solid, if unspectacular,” analyst John Aiken at Barclays Capital said in a research note to clients Thursday morning.

TD profit rises Toronto-Dominion Bank went in the other direction, with profit climbing to $1.69-billion, or $1.78 a share, from $1.4-billionor $1.50 a year earlier.

But the bank signalled that the pace of growth in its earnings will be difficult to maintain, with loan growth slowing, low interest rates squeezing profit margins, and regulations posing new challenges, The Globe and Mail's Tara Perkins writes.

The results came in slightly ahead of analysts’ expectations, RBC Dominion Securities analyst Andre-Philippe Hardy said in a note to clients. Profit from consumer banking and wealth management was slightly higher than he expected, while wholesale banking earned a little less than he expected.

Timken to close plant Bearing manufacturer Timken Co. plans to close its plant in St. Thomas, Ont., in the next year, another blow to one of the cities hit hardest by the recession and the troubles in Canada’s manufacturing sector.

The move will eliminate about 190 jobs, The Globe and Mail's Greg Keenan reports.

EI rules unveiled The Canadian government unveiled a sweeping overhaul of its Employment Insurance system, creating three new tiers of job hunters that will most directly affect repeat users of the program.

The new rules will mean less generous terms for frequent users of EI, while giving those who rarely use the program more leeway to look for jobs in their field, The Globe and Mail's Iain Marlow reports.

Benefit recipients will also be expected to accept job openings that are about an hour away - or possibly further - based on regional commuter patterns.

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