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A loud alarm on Canadian home prices and a reminder of the ‘ugly’ 1980s

Briefing highlights

  • Fitch warns on Vancouver, Toronto home prices
  • BMO recalls 1980s housing shock
  • Unilever rejects Kraft Heinz merger bid
  • Air Canada posts bigger quarterly loss
  • Samsung chief arrested, probe deepens
“Homes are quite simply selling faster than they can be listed.”
Douglas Porter, BMO

Fitch Ratings is ringing fresh alarm bells over house prices in Vancouver and Toronto.

And rather loudly, at that.

Home prices in the two cities are “unsustainable,” the credit rating agency, one of the world’s big three, said in a new global report.

Canadian prices won’t contract outright this year, Fitch added, but their rise will slow sharply.

“Canadian home prices are not supported by underlying fundamentals and the risk of a price fall in overvalued markets has risen,” Fitch said, citing Vancouver and Toronto.

“Local and federal government efforts to tighten loan eligibility and restrict certain buyers should slow price rises to around 3 per cent nationwide in 2017, from 12 per cent last year.”

Fitch was referring to both Ottawa’s tax and mortgage changes, and the B.C. government’s 15-per-cent tax on foreign buyers of Vancouver area homes, which has already led to a sales slump there.

As many other observers have warned, Fitch also flagged debt burdens that have reached record levels in Canada as mortgage lending swells amid the price surge.

“Household debt reached a new high of almost 168 per cent of disposable income in [the second quarter of 2016] and breached 100 per cent of GDP,” the agency said.

“This is the first time that household debt has exceeded the size of the Canadian economy and is higher than the U.K. and U.S. household debt burden.”

Fitch also noted, as others have, that the debt-to-GDP ratio has now topped the level of what the U.S. experienced in the runup to the financial crisis.

For the record, observers have not flagged such a scenario in Canada.

What happens next, though, is a guessing game at this point.

“More conservative downpayment requirements, tighter underwriting standards, and potential lender risk-sharing arrangements should help stabilize the housing market and improve affordability, despite the possibility of higher mortgage costs,” Fitch said.

“The cumulative effect of these changing dynamics on home prices is likely to be negative, but is yet to be determined as these steps are unprecedented.”

The Fitch warning came in the wake of a declaration by BMO Nesbitt Burns chief economist Douglas Porter that Toronto and its surrounding communities now have a bubble on their hands.

“Above and beyond the soaring 20-per-cent-plus gains in home prices across Toronto (and neighbouring cities), what really stands out in the latest figures is the extreme imbalance between sales and listings,” Mr. Porter said, noting that measure hit a record 93.5 per cent in January, compared with the 40 per cent to 60 per cent deemed normal.

And in some regions, it has eclipsed the 100-per-cent mark. That means that “homes are quite simply selling faster than they can be listed,” Mr. Porter said.

“Now January can be pushed around by wonky weather, but note that the 12-month average for this ratio in Toronto has now surged to 74.5 per cent,” he added.

“That, too, is an all-time high, even moving above the boom/bubble years of the late 1980s. We are sounding this warning now to hopefully avert anything close to a repeat of that ugly episode.”

Kraft stalks Unilever

Kraft Heinz Co. is looking to create an even bigger empire, with a $143-billion (U.S.) proposal for Unilever that the target company quickly rebuffed.

Unilever said the $50-a-share cash-and-stock proposal undervalues the company, while Kraft said it’s still hoping to work toward a deal.

Shares of both companies gained.

“There is a good chance that governments will hate it, and it is inevitable that competition authorities and regulators will want to have a look at it,” said CMC Markets chief analyst Michael Hewson.

“There will undoubtedly be competition concerns given how big any new company would be, and Kraft is already in the process of drilling down on costs as a result of its recent $100-billion merger with Heinz in 2015.”

Stocks tumble

Global markets are anything but a fine-tuned machine so far.

Stocks are sinking across major exchanges, with New York poised for a weaker open.

“With no major data out of the U.S. ahead of the long bank holiday Presidents Day weekend and no big earnings reports, the week will be finishing with investors weighing up the likelihood of another Trump Twitter rampage or press conference,” said CMC's Mr. Hewson, a day after President Trump told reporters his administration is “running like a fine-tuned machine.”

“Whilst these create great headlines for the media, it does little to improve stability in the markets, and many will be wondering whether the honeymoon period is already over.”

Tokyo’s Nikkei lost 0.6 per cent, Hong Kong’s Hang Seng 0.3 per cent, and the Shanghai composite 0.9 per cent.

In Europe, London’s FTSE 100 was up 0.2 per cent as North American markets were getting up and running, while Germany’s DAX and the Paris CAC 40 were down by between 0.5 and 1 per cent.

The Canadian dollar was holding its own at almost 76.5 cents U.S.

“The rift between the press, the U.S. intelligence community and Trump appears to be growing day by day, despite what the president would have you believe,” said IG market analyst Josh Mahony.

“We have seen an incredible rally across stocks and the dollar during Trump’s initial period in power, yet with questions persisting over the Trump team’s contacts with Russia, this story could yet see everything come down like a house of cards.”

How markets ended Thursday

THE GLOBE AND MAIL » SOURCE: QUANDL

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