Briefing highlights
- Canada still at risk of financial crisis
- But key gauge of threat has eased
- Global markets at a glance
- What to expect from GDP, central bank surveys
- Home Capital holds annual meeting this week
- Takata files for bankruptcy, finds U.S. buyer
14.1
Canada remains at risk of a financial crisis, though a key gauge of that threat has eased noticeably.
Indeed, Canada is one of the countries that stands out among those studied by the Bank for International Settlements.
The annual report released Sunday by the BIS, a body made up of the world's central banks, shows an early-warning indicator eased in the fourth quarter of 2016 but remains above the threshold for probable stress on a banking system.
Known as the credit-to-GDP gap, it measures the ratio of debt to gross domestic product, compared to its long-term trend.
In Canada, according to the latest reading, it stands at 14.1 percentage points above the long-term average, declining from 17.4 in the third quarter.
That's a significant decline, to be sure. Not only that, 14.1 is the lowest level in several quarters, and isn't particularly elevated, either. But what's more important than whether the number rises or falls is whether it's above 10, which signals the possibility of a crisis within three years.
The BIS measure includes all credit to the non-financial sector, and thus takes in loans and other things like debt securities, and is meant to help guide the level of capital buffers among a country's banks.
Canada has also breached a "critical threshold" at least once in the past five years where real estate is concerned, with a separate measure that looks at property price aberrations, also from the long-term trend.
This should be no surprise given the inflated home prices in the Vancouver and Toronto.
Also flagged by the BIS is another measure that looks at how we juggle our debts when interest rates rise.
The debt-service ratio isn't particularly troublesome now, but would be in the red zone should rates rise by 2.5 percentage points.
The Bank of Canada should be at least pleased that the measure is heading in the right direction, down.
The central bank said the credit-to-GDP gap is just one of the tools it uses to measure such risks.
"As Canada's central bank, we don't rely mechanistically on any single measure, but look at a wide range of indicators when assessing Canadian financial system vulnerabilities," it said, noting it publishes its financial system review twice a year.
In fact, it warned of high household debt levels and inflated home prices in its recent review, though it isn't calling for a meltdown.
Repeated in Sunday's annual report, the BIS had released the gap figures earlier in June, when it also flagged the run-up in Canadian home prices.
Such concerns are hardly new in Canada, where federal and provincial governments have moved to tame housing markets, particularly in Vancouver and Toronto.
Worth noting, though, is that most observers don't fear a meltdown, like the great one in the U.S. that few will ever forget. Also worth remembering is that Canada's banks are deemed sound, though were recently downgraded by Moody's for these very reasons.
Keep in mind, too, however, that the Bank of Canada has signalled interest rates could rise earlier than expected, and that the many vulnerable households across the country should prepare for that.
"Concerns about household financial vulnerability are also prominent given the expectation that interest rates will rise from their historically low levels," Canada's Parliamentary Budget Officer said in a report last week.
Like other observers, the PBO flagged the fact that the ratio of debt to income in Canada has been at or near record levels. And it's going to rise as home prices climb and lending rates stay relatively low even when they rise.
"Over 2019 to 2020, household debt relative to disposable income is projected to be 10 percentage points higher on average," the report said.
Like the BIS, the PBO also looked at what is now a stable debt-service ratio.
"Based on PBO's April 2017 outlook, we project that household debt-servicing capacity will be stretched even further over the medium term as interest rates return to more normal levels."
"We are projecting that the household sector will become increasingly vulnerable to negative shocks," the PBO report said.
The Fitch Ratings agency also weighed in on this a few days ago, and, like other observers, it doesn't see an American-style crash because of the differences in the markets and the fact that the "quality" of loans in Canada is strong.
But there's always a but.
"Fitch continues to believe that home price declines will be tempered by the proactive measures taken by the Canadian government, close regulatory oversight and sound underwriting principles, supportive macroeconomic conditions and strong housing demand," the agency said.
"However, measures taken to date to slow price growth appear to have had a temporary effect and the price trajectory in Toronto and Vancouver is likely to continue," it added.
"For this reason, Fitch believes a more severe correction is increasingly likely especially if there is an unexpected sharp rise in interest rates or unemployment."
There has been a noticeable cooling in Toronto, though observers wonder if that will simply be temporary, as was the case in Vancouver.
Read more
- Janet McFarland: Toronto market: Taking a breather or set for a market correction?
- After the GFC (Great Financial Crisis), the GHF (Great Canadian Housing Froth)
- Toronto, Vancouver: Housing bubbles or simply world-class cities?
- David Parkinson: Threat from housing, high debts growing: Poloz
- David Parkinson: OECD sees higher rates as housing remedy
- Matt Lundy: Sustained chill or Vancouver-style rebound?
- Janet McFarland: Toronto’s housing market feels chill
- Yes, a sudden chill. But look at these Toronto home prices
- Vancouver housing market heats up
- Chill, Canada isn’t 2006 America
- Citi on Canada: Solid outlook, housing correction, loonie that won’t hit par
Markets at a glance
Read more
What to watch for this week
It's all about when the Bank of Canada pulls the trigger.
As The Globe and Mail's Rachelle Younglai writes, the possibility of higher interest rates is now the probability, and that's what markets will be considering when they scour two key reports on Friday.
Analysts are generally weighing whether the central bank will move in October to raise its benchmark overnight rate from the emergency low of 0.5 per cent, or wait until later. A July rate hike is also a possibility, but most observers don't expect that.
But while the Bank of Canada has signalled higher rates, there's now the recent drop in oil prices to consider.
First up on Friday morning is Statistics Canada, with a look at how the economy performed in April, or how it kicked off the second quarter after a strong first three months of the year.
Economists expect the report to show a slower pace of economic growth.
"While we only expect a modest 0.1-per-cent increase in GDP, coming off the heels of a strong March, that would still be enough to keep Q2 on pace for a 2– to 2.5-per-cent annualized growth rate," said Andrew Grantham of CIBC World Markets.
Later that morning, the Bank of Canada releases its business outlook and senior loan officers surveys, which markets will watch for signs of optimism that could play into the timing of rate increases.
"This will be the most closely followed [business outlook survey] in some time as market participants look for clues on potential rate hike timing following the BoC's hawkish shift on June 12," observers at Royal Bank of Canada said in a lookahead to that report.
"We think preliminary results from the survey were likely available ahead of the recent speech and may have contributed to the upbeat tone."
Watch, too, for what Bank of Canada Governor Stephen Poloz has to say during a panel discussion on Wednesday..
"We'll be looking for any remarks as to whether the recent dips in oil price and Canadian inflation could influence his new more hawkish tone," said CIBC's Mr. Grantham.
Amid all this comes the annual meeting of Home Capital Group Inc., the recently-troubled-but-now-rescued Canadian alternative mortgage lender.
Home Capital had been a concern among international market players who saw its troubles as a sign of wider concerns over Canada's mortgage market, despite the fact that it's such a small player. Those fears have since eased.
Home Capital executives can now boast to shareholders that none other than Warren Buffett is investing in the company and replacing a line of credit.
We'll see what investors have to say at Thursday's annual meeting after the stock's initial plunge and rebound.
Canadian agency DBRS Ltd., for one, has maintained existing ratings, pointing to the aid from Mr. Buffett's Berkshire Hathaway Inc. as a good sign but still raising uncertainty.
"DBRS views [last week's] developments as positive for HCG, given the reputational backing of an investor such as Berkshire; however, DBRS notes that the capital injection that the investment would provide is not significant relative to the group's liquidity and funding needs."
Read more
- Rachelle Younglai: Busy week to offer clues on Bank of Canada rate-hike timing
- Barrie McKenna: What does inflation-fighting central bank do when there’s no inflation?
- How Warren Buffett struck the handshake Home Capital deal in just three days
- Why Warren Buffett is bullish on Canada
- Home Capital opts for ‘smart investor’ with Buffett rescue
- The nuts and bolts behind Home Capital’s deal with Berkshire Hathaway
- Why copycats can’t follow Buffett’s lead on Home Capital
- Wavering on Home Capital high-interest GICs? Buffett’s got your back