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Briefing highlights

  • CREA projects B.C. housing slump
  • Home sales fall for first time since 2012
  • BoC sees housing risks easing
  • FAQs about consumer, government debt

CREA forecasts slump

Canada’s realtors project that the slump in British Columbia’s housing market will deepen next year, with a decline in both sales and prices.

That decline will be led by detached homes, largely in the higher price range and particularly in the Lower Mainland.

Vancouver sales have been easing since February, the decline picking up steam in the wake of a new tax on foreign buyers and new mortgage and tax measures by the federal government.

It’s worth noting, though, that Vancouver is coming off a huge year.

In a new forecast, the Canadian Real Estate Association now predicts sales in B.C. will tumble by 12.2 per cent in 2017, while prices will erode by 7.8 per cent.

As other economists have projected, Ontario will also be hit, the group said, with sales sinking 2.7 per cent but prices still up modestly at around the pace of inflation.

“Transactions in B.C. and Ontario are anticipated to remain strong but fall short of this year’s record levels due to deteriorating affordability, an ongoing shortage of affordably priced listings for single family homes and tightened mortgage regulations,” it said.

Nationally, CREA projects sales to decline by 3.3 per cent to 518,900, slipping, too, in Saskatchewan, Nova Scotia, Prince Edward Island and Newfoundland and Labrador.

Sales are forecast to rise by 3.5 per cent in Alberta, which had been hit by the oil shock, and 1.2 per cent in Quebec. Sales are also expected to gain in Manitoba and New Brunswick.

CREA also projects that the average national home price will slip 2.8 per cent to $475,900, with Manitoba, Quebec, New Brunswick and Nova Scotia sharing in the modest gains with Ontario.

“Small declines of a similar magnitude” are forecast for Alberta, Saskatchewan, Prince Edward Island and Newfoundland and Labrador.

On a national basis, home sales tumbled 5.3 per cent in November, the fastest drop since August, 2012.

What’s more, sales slipped in two-thirds of the local markets, and CREA hinted this may have been tied to the new federal measures.

“November was the first full month in which the expanded stress test was in effect for home buyers with less than a 20-per-cent down payment,” CREA chief Cliff Iverson said in a statement.”

The MLS home price index still rose at an annual pace of 14.4 per cent.

Toronto-Dominion Bank economist Diana Petramala said the impact of the federal regulations was “more immediate” in smaller markets than those that depend on first-time buyers.

“Second, an expected shift in foreign buying from Vancouver to Toronto has limited the immediate impact of the new regulation on the GTA and the surrounding areas, although the full impact may not be felt until the first quarter of next year due to lags on pre-approved mortgages,” she added.

BMO Nesbitt Burns senior economist Robert Kavcic also cited the fact that November was the first full month for the new mortgage rules, noting the “softness” spread across 22 of 26 markets.

“That said, 16 of those 26 markets were still looking at sales above year-ago levels in the month.”

BoC sees housing risks easing

The Bank of Canada’s latest assessment of the country’s financial-system risks shows that it remains chiefly concerned about Canadians’ high debts and heavy exposure to the housing market, but it expressed confidence that new national and regional mortgage and housing measures will alleviate those pressures ‘over time,’” The Globe and Mail’s David Parkinson reports.

The central bank’s financial system review also downplayed the dangers from the recent rise in bond-market interest rates, and signaled that the risks from the slump in commodity prices are fading.

What we owe for each $1 of disposable income

These should be frequently asked questions about Canadian consumer and government debt, though many of us don’t want to hear the answers all too frequently.

But let’s ask them anyway in light of the latest report on Canadian consumer and government debt.

Q: What do the latest statistics on consumer debt mean?

Nothing good.

As The Globe and Mail’s Rachelle Younglai reports, the key measure of a consumer’s burden, household debt to disposable income, climbed in the third quarter to 166.9 per cent.

As Statistics Canada put it Wednesday, that means we owe about $1.67 for every $1 of our disposable income.

Much of this has to do with rising property values and low borrowing costs. It’s cheap to borrow, so why not go out and buy a house?

Household debt now stands at more than $2-trillion, about $1.3-trillion of that in mortgages. We’re also getting richer, but hold that thought.

“The fact that household net worth rose to a record high of 843.4 per cent of disposable income mitigates some of the concern about rising debt levels,” said David Watt, chief economist at HSBC Bank Canada.

“However, private non-financial debt rose to a record high 220.3 per cent of GDP, around an 18.7-percentage-point gap with its long-run trend,” he added.

Q: Why is this happening?

We’re borrowing at a faster pace than our incomes are rising.

The increase in the third-quarter debt burden wasn’t huge, up from 166.4 per cent in the previous three-month period and, according to BMO Nesbitt Burns, the slowest rise for a third quarter since 2000.

Ah, but ...

“Even with the more modest increase, the upward trend in household debt, which started as far back as we have data (the series starts in 1990), continues unabated,” said BMO senior economist Benjamin Reitzes.

“However, we might start to see the ratio flatten out a bit in 2017 as the Vancouver housing market has cooled notably due to the foreign buyers’ tax, and the new mortgage rule should dampen activity modestly in 2017,” he added.

“Importantly though, housing in Toronto and the surrounding region remains quite strong, which will likely push debt loads higher.”

Q: Are we in trouble?

Some of us could be in the event of an economic shock. The Bank of Canada has already issued warnings about the number of vulnerable families, and is likely to do it again today when it releases its review of the financial system.

The central bank isn’t alone. Remember when Mark Carney was Bank of Canada Governor, and warned about this repeatedly?

We’ve also heard from several groups, including the International Monetary Fund, the Organization for Economic Co-operation and Development, and, most recently, the Bank for International Settlements.

“This reinforces that debt levels in Canada are high and are expanding rapidly, potentially leaving the country accident-prone in the event of another financial crisis,” said HSBC’s Mr. Watt, citing Wednesday’s numbers.

Q: But household net worth is also rising?

Right. Net worth rose 2.5 per cent in the third quarter to $10.1-trillion, or $278,200 on a per-capita basis.

That was driven largely by higher stock and property values.

But what happens should a bubble pop, which, for the latter, we’re seeing signs of in Vancouver?

“Despite the rise in the household debt-to-income ratio, the third quarter marked an overall improvement in the household balance sheets, as rising asset values and low interest rates helped offset higher credit balances,” said Toronto-Dominion Bank economist Diana Petramala.

“Asset values will continue to rise sharply with the recent rebound in the TSX/S&P index and continued growth in home prices, but households are starting to lose the support of a low interest rate environment,” she added.

“The five-year government bond yield has jumped 50 basis points since the U.S. election and borrowers have so far passed nearly 20 basis points of that increase onto consumers.”

Scott Hannah, chief of the Credit Counselling Society, noted that these numbers come just as we’re heading into the holiday shopping season.

“Low interest rates are helping to keep the economy under control, but this isn’t something that will continue for a prolonged period of time,” he said.

“It’s tempting to take out more loans and use up credit since interest rates are so low, but when interest rates increase, it’s going to leave many Canadians in greater financial difficulty.”

Q: Could the debt burden grow even fatter?

It could, and it will.

“The rise in the debt-to-income ratio was modest, when set against activity in the resale market, as debt growth remains much slower than the 10-per-cent to 11-per-cent pace recorded during the 2004 to 2007 boom,” TD’s Ms. Petramala said.

“However, credit growth is estimated to clock in at 5.6 per cent in 2016, the sharpest gain since 2011. This pace of credit growth is likely to push the debt-to-income ratio up a further three percentage points by the end of next year, to near 170 per cent.”

Q: Could this affect the economy?

Like the answer above, it could, and it will.

“Lofty debt levels and rising interest rates are likely to put some downward pressure on both consumer spending and housing activity, holding economic growth below the 2-per-cent pace through 2017 and 2018,” Ms. Petramala said.

It also means that this is going to remain on the Bank of Canada’s radar, though it’s not likely to do anything about it, leaving that issue to governments.

“The rise in the debt-to-income ratio is ostensibly the highlight of today’s snapshot of households’ financial positions, notably as the uptick occurred despite an outsized boost in personal incomes attributed to the child care benefit payments that began in July,” said Royal Bank of Canada economist Laura Cooper.

“Encouragingly, the household saving rate did surge by a full percentage point over the period to reach its highest level since Q1/01,” she added.

“That said the further deterioration in the oft-cited debt metric will serve to strengthen the Bank of Canada’s appraisal that elevated household indebtedness remains a key vulnerability to financial stability.”

Q: What about government debt?

“While most attention on rising debt loads in Canada is directed at households, we would just point out that governments are still the reigning champion in the debt world,” said BMO chief economist Douglas Porter.

According to the Statistics Canada report, gross debt among all Canadian governments climbed to 117.7 per cent of GDP in the third quarter, up by more than two percentage points in a year.

That’s the fattest since the first quarter of 2000, according to BMO, though slimmer than the 135.5-per-cent postwar peak.

“Yes, apologists would sputter, but net government debt is 43.2 per cent of GDP,” Mr. Porter said.

“Yes, we would respond, but ‘net’ household debt is sub-zero, since assets are now six times larger than debt.”