This is not 2008, a blog posting, got a lot more attention than I expected after I posted a link on social media. In it, Ritholtz Wealth Management’s Michael Batnick shows how different and safer the U.S. housing market has become over the past 14 years. The same, unfortunately, is not the case for the domestic real estate market.
There are numerous reasons to believe that the Canadian residential market shows more signs of a 2008-style bubble than the U.S. market. For one, domestic home prices have increased by 420 per cent since 2000 while U.S. home prices are up about half of that, at 209 per cent.
The financial crisis included a correction not only in U.S. home prices but also in household debt. The U.S. household debt-to-GDP ratio was 100 per cent just before the financial crisis and now it’s 80 per cent. The Canadian debt-to-GDP ratio did not correct during the financial crisis. As high as 113 per cent at the end of 2020, the ratio now stands near the U.S. peak at 97 per cent.
Debt levels are high but a domestic financial crisis is highly unlikely. Ebrahim Poonawala, a bank analyst at BofA Securities, researched company filings for all the major banks in Canada regarding their mortgage exposure. He found few if any concerns on this front, even with rapidly rising interest rates.
Royal Bank management noted that higher rates would trigger higher payments or longer amortizations for 80,000 mortgages. However, they also noted that well below 0.5 per cent of customers would even require a phone call for support.
Bank of Montreal executives emphasized the large proportion of mortgages insured by Canada Mortgage and Housing Corp. Many borrowers would see significant increases in monthly payments when they renew their mortgages, but “renewals are spread out over time, and only 10 per cent of uninsured installment [mortgages] are up for renewal in the next 12 months, giving borrowers time to adjust.”
Perhaps the biggest difference between the United States before the housing crisis and Canada now is the lack of derivatives domestically. In 2007, U.S. underwriters were shovelling low quality mortgage-based debt instruments out the door but they believed they had insured themselves against potential losses with credit default swaps. Once it became clear that this insurance was no good, the entire financial system froze – no institution knew how solvent their potential counterparties were.
A correction in the domestic housing market is likely to be painful. Mr. Poonawala noted that housing prices would have to fall 42 per cent on average just to retrace pandemic period gains. There will no doubt be personal debt defaults and corporate bankruptcies among lower-quality lenders. Given the strength of the banking system, however, combined with the lack of derivative exposure, a domestic financial crisis remains unlikely. Bank investors should take note.
-- Scott Barlow, Globe and Mail market strategist
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Stocks to ponder
Bank of Nova Scotia (BNS-T) The lender’s share price has underperformed its peers this year by a wide margin, raising the question of whether investors should embrace the upcoming leadership change at Canada’s third-largest bank. David Berman suggests a better approach: Worry less about changes in the C-suite and take a closer look at the stock’s compelling valuation.
The Rundown
Bond markets are crashing – and the risks and rewards for investors are only growing
The global bond market has effectively undergone a full-blown crash. Since mid-2020, the 10-year Canadian government bond has seen yields explode from 0.50 per cent to 3.31 per cent. Since prices move inversely, that’s translated into big losses for bold holders. Over much of that period, Canadian bond yields have risen in sync with U.S. Treasuries. But lately, that’s starting to change. Bond fund manager veteran Tom Czitron discusses the latest gyrations in credit markets and the risks and rewards it presents to investors.
Also see:
Surging bond yields spook investors, capping Canadian dollar gains
Fed’s neutral rate forecast nods to ‘transitory’, eventual pivot
Crowd of U.S. dollar bulls raises risk of violent pullback
Lowered profit forecasts raise concerns on shaky Wall Street
Recent profit warnings from bellwether companies like Ford Motor Co, may signal more challenges ahead for corporate America, increasing wariness for investors as the stock market deepens its sell-off, as Reuters reports.
Also see: Options activity hints U.S. stock market has not reached bottom: Barclays
Embattled emerging markets face fresh pain from U.S. rate hikes
The prospect of U.S. interest rates climbing to levels last seen in the run-up to the global financial crisis has cast a fresh pall over emerging economies that have battled to recover from COVID, grappled with rampant inflation and faced capital flight.
Also see: Why no news may be good news for China-watching investors
We’re heading into a much different world. Investors in stocks, bonds and real estate aren’t going to like it
Financial markets are too optimistic about inflation and interest rates in the long run and the effect they will have on economic growth, says value investing professor Dr. George Athanassakos, who explains why he believes the future will look much different than the past.
Others
New features come to Globe Investor’s stock screener
Number Cruncher: Ten defensive TSX dividend stocks that are too cheap to ignore
Wednesday’s analyst upgrades and downgrades
Tuesday’s analyst upgrades and downgrades
Wednesday’s Insider Report: CEO invests nearly $500,000 in this energy stock
Tuesday’s Insider Report: Trustee invests in this REIT yielding 6% and trading at a 52-week low
Globe Advisor
ETFs with largest inflows underperform rivals, studies show
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What’s up in the days ahead
Financial adviser John DeGoey has a warning about investors having too much optimism and false confidence.
Click here to see the Globe Investor earnings and economic news calendar.
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Compiled by Globe Investor Staff