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Why the world is agog over Canadian home prices and debt: A special report

Briefing highlights

  • World agog over housing, debt
  • What to expect from CREA, debt reports
  • Markets at a glance
  • First bitcoin futures on the rise
  • What to watch for from the Fed this week
  • What to expect from Bank of England, ECB
  • What else to watch for in next few days
  • Canadian Solar CEO bids to take it private

Some of the "madness" in Canada's housing markets may have abated, but observers fear sanity may be short-lived and that many families are now in a precarious position as interest rates rise.

Indeed, Vancouver's inflated market is rebounding from its tax-induced slump, and economists believe Toronto could follow the same path.

We'll hear a lot more about it this week when the Canadian Real Estate Association releases its look at how sales and prices fared in November and Statistics Canada reports on the debt burden among households, already among the most troubling levels in the world and expected to rise higher still.

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"Ten years of macroprudential policies have helped to mitigate household borrowing behaviour threats to the financial system, but risks still remain," Citigroup economist Dana M. Peterson said of the various measures taken in Canada, from taxes on foreign buyers in Vancouver and across Ontario to the latest mortgage-qualification rules from the commercial bank regulator.

"The latest round of policies tightened underwriting standards in the uninsured mortgage market," she added in a recent outlook, warning that new restrictions could drive "marginal" borrowers further into the arms of "unregulated, shadow-banking" lenders.

And "foreign buyers could prompt additional bouts of froth and price spike in other cities (e.g. Montreal, Ottawa)," Ms. Peterson said.

Everyone has something to say about Canada's housing markets and the debt levels that climbed as home prices spiked, from groups such as the Bank for International Settlements and the Organization for Economic Co-operation and Development to credit rating agencies and bank analysts.

Here's a look at the numbers, issues and observations that illustrate how the world is absolutely agog over Canada's housing markets:

State of the markets

It's largely about the Vancouver and Toronto areas, of course, and we've already seen those November numbers on sales and prices, which will factor into CREA's national report on Thursday. The group also plans to release updated forecasts.

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Bank of Montreal expects the report to show existing home sales rose 2 per cent in November from a year earlier, with average prices up 5 per cent and the MLS price index, which is seen as a better measure, up 9.5 per cent.

An asset price gain of 9.5 per cent would be nothing to sneeze at, but consider this: That would mark the slowest rate of 2017 and a sharp decline from the peak of almost 20 per cent in April, noted Benjamin Reitzes, BMO's Canadian rates and macro strategist.

"Existing home sales likely rose in November, breaking a seven-month losing streak," Mr. Reitzes said.

"A big improvement in Toronto provided a lift, with sales down about 13 per cent, a significant move from the 35-per-cent average decline over the past five months," he added in a forecast on Thursday's numbers.

"The mix of activity has changed from the booming sales seen earlier this year, with condos now driving the gains instead of single-family homes. A similar dynamic is playing out in Vancouver, where sales continue to bounce back, rising more than 20 per cent year over year, while Fraser Valley activity surged nearly 40 per cent."

Ottawa, Montreal and Prairie regions are also picking up, Mr. Reitzes said, adding there could be a stronger-than-normal pace in what is traditionally a soft December as buyers scramble to beat new Jan. 1 mortgage rules from the Office of the Superintendent of Financial Institutions.

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As for Toronto, the latest numbers are "further evidence that the market is shrugging off the recent policy-induced turbulence," said Toronto-Dominion Bank economist Rishi Sondhi.

The Greater Toronto Area is a work in progress, with active listings in November more than double the levels of a year earlier.

"Not shockingly, prices continue to correct in the region after making like bitcoin to start the year," said BMO chief economist Douglas Porter.

"Detached home prices in the GTA are now down almost 6 per cent year over year and are – gasp! – back below the $1-million threshold on average."

Also worth noting is that the home ownership rate across Canada has declined, to 67.8 per cent last year from 69 per cent five years earlier. It fell "quite sharply" for young, first-time buyers, noted Will Dunning, chief economist at Mortgage Professionals Canada.

"This ends a generation-long rise in the ownership rate," Mr. Dunning said.

"The gradual rise in the ownership rate during 1976 to 1991 can be attributed to economic progress," he added in an in-depth report on the housing and mortgage markets.

After that, the market was driven by low interest rates and less-expensive housing such as condos and townhomes.

"Whether the drop in the homeownership rate in 2016 is a pause in a long-term trend or a reversal of the long-term trend remains to be seen, but the signs are not encouraging."

FOMO, or fear of missing out, helped drive the markets until recently, but the "period of panic did not last very long, and was replaced by caution," Mr. Dunning said.

At the same time came the provincial measures in British Columbia and Ontario, followed by OSFI's move to making it harder to qualify for a mortgage. Let alone that inflated markets had priced so many people out of the game.

But "we should expect that resale activity will trend upwards over time: A growing population means that there are more potential buyers; concurrently, ongoing completions of new housing means that there is more housing in existence that could possibly be sold," Mr. Dunning said.


Over, obviously. As in, overvalued and overextended.

Inflated prices in Canada are no doubt the envy of homeowners around the world, with the possible exception of Sweden, Australia and New Zealand who, as Mr. Porter might put it, are also making out like bitcoin bandits.

But not the envy of policy makers in countries where housing and debt aren't out of control.

Canada ranks high by various measures.

"OECD real house prices dipped following the 2008 financial crisis and remain below the 2007 high," said Alvin Tan of Société Générale.

"The U.S. in particular suffered a significant drop in national real house prices in the four years between 2008 and 2012," he added in a report on housing as it relates to currency outlooks.

"However, housing prices in Sweden, Australia, New Zealand and Canada barely stopped rising during the crisis and have ascended much higher over the past decade. These same countries now have among the highest household debt burdens, too."

Among the statistics Mr. Tan cited are these:

"Observing how the price-to-rent and price-to-income ratios have evolved since 2010, we notice that some countries have experienced strong growth in one indicator but less in the other," Mr. Tan said.

Hold that thought.

"We also notice that New Zealand, Canada and Sweden are among the top four countries in the sample for both indicators."

And here's a telling chart:

Most observers believe the Canadian markets are, at this point, headed for a soft landing rather than a meltdown.

As Derek Holt, head of capital markets economics at Bank of Nova Scotia, put it in a study last week: "Housing moderation, no bust in Canada."

Housing markets, Mr. Holt said, are supported by demographics, the nature of the mortgage market and a "big equity buffer."

What we owe

There are two key measures: One looks at the amount of our debt relative to our disposable income, the other at the cost of juggling it, also compared to how much we have to spend.

On the first count, household debt to disposable income now stands at almost 168 per cent, which means we owe $1.68 for every dollar of disposable income.

On the second, the debt-service ratio is just over 14 per cent, which Citigroup's Ms. Peterson expects to rise to 16.5 per cent by 2020 as interest rates climb.

Statistics Canada is expected to report Thursday, 30 minutes before the CREA numbers, that it's getting worse, possibly hitting a fresh high.

Economists believe this third-quarter report could show the debt-to-income ratio nudging the 170-per-cent mark.

"Canada's household debt ratio likely hit another record high in Q3 as debt growth continued apace, while income growth couldn't quite keep up," said BMO's Mr. Reitzes.

"With the new OSFI rules set to take effect on Jan. 1, 2018, activity could pick up in Q4 in an effort to get ahead of the change," he added.

"That suggests we'll see yet another record high debt ratio in Q4, before we potentially get some flattening or a drop at least in the early part of 2018. Seasonally, debt ratios have risen in every Q3 since 1990 (an average of 1.2 percentage points), so an increase should not be a surprise."

At this point, we're pretty good about our monthly payments, with defaults at a low level. But some worry there could be more adult delinquents as rates rise.

"Over all, Canadian balance sheets are in decent shape, despite the persistent concerns about debt burdens," Mr. Reitzes said.

"The question now is: How sensitive are households to higher rates? Time will tell."

That's what everyone wants to know.

"This is in line with what we are seeing at the Credit Counselling Society, growing debt levels across all age demographics to the point where over 50 per cent of those contacting us for assistance are overwhelmed by their financial situation," the group's president, Scott Hannah, said of a recent Statistics Canada survey that shows it's much harder now to become debt-free.

Scotiabank's Mr. Holt isn't overly worried, though, noting that defaults are low, and traditionally have been even during recessions.

"Canada has witnessed some big price corrections since the late 1980s that corresponded with big shifts in the macro environment, notably in Toronto and Vancouver, and yet each time mortgage arrears barely budged," he said.

"Implication? Originations are at greater risk than charge-offs."

Potential impact

Well, the worst-case scenario would be a meltdown, mayhem, we lose our jobs and we forfeit our homes.

No one expects that, but that doesn't mean risks don't abound.

Among the optimistic signals is that the Bank for International Settlements, a group made up of central banks, recently lowered its alarm from red to yellow.

The BIS measures what's known as the credit-to-GDP gap, which compares that ratio to its long-term trend. If a country is above 10 – which means 10 percentage points above the norm – there's a big risk of a financial crisis.

Canada had been above 10, but recently eased to 9.4, which means there's still a threat but not as severe.

"Apart from housing market valuation, another equally important consideration is the household debt burden," said Société Générale's Mr. Tan.

"It is after all the nexus between housing prices and the credit market that is the issue for financial stability. If we look at the ratio of household debt to disposable income, Norway and Australia are ahead, but Sweden, Canada and New Zealand are not far behind either."

Of course, uncertainty is widespread in this era, and life depends on everything from geopolitics to interest rates to the fate of the North American free-trade agreement, which is now being renegotiated.

The Bank of Canada raised rates twice this year, then paused, and markets are waiting for signals of what comes next. The central bank says the situation is improving along with policy measures, and it's monitoring the impact of this year's tightening.

But "the global monetary policy tightening trend may place increased upward pressure on bond yields at a pace that Canadians would not be able to absorb," said Citigroup's Ms. Peterson, referring to the rise in mortgage rates, which are linked to the bond market.

And, obviously, anything is possible in Donald Trump's America.

"The housing market could also become a bigger issue for Canada if the NAFTA renegotiation collapses and the United States pulls out, which would be a negative shock to the Canadian economy," Mr. Tan said.

So the jury, as they say, is out. But it's not looking like a guilty verdict just yet.

"High household debt (around 168 per cent of disposable income, or just above 100 per cent of GDP, compared with 90 per cent in the U.S.) and the potential for a correction in house prices increase downside risks to the growth forecast as interest rates rise," the Fitch Ratings agency said in its latest outlook.

"The household debt service ratio, which is already at 14 per cent, relatively high by historical standards, is set to rise, but very gradually. Measures of loan impairment are at cyclical lows, and Fitch expects them to rise but sees bank ratings as robust to these potential shocks."

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Markets at a glance

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Hawks, doves and swans: The week ahead

Hawks and doves – and one swan – are on display as the world's major central banks close out the year with rate decisions.

Two of them, the Bank of England and European Central Bank, are expected to take no action.

But markets are betting on a rate hike from the Federal Reserve, which could well mark chair Janet Yellen's swan song as there will be just one more meeting to go, in January, before she hands the job to Jerome Powell, President Donald Trump's choice to lead the central bank.

We'll also hear from Bank of Canada governor Stephen Poloz, and markets will be watching closely for signs of when he'll begin raising rates again.

Monday: Bit-much

This looks to be the slowest day of the week, based on the calendar.

But it's anyone's guess as to what happens with bitcoinmania today after last week's wild ride.

Should we worry about bitcoin as a broader threat?

Unless you own some, nope. It's not a house. It's not a broad stock market. It's not even a pretty tulip, which at least you could look at in the 1600s.

What it is is a "curiosity, but not a major economic risk," said Andrew Kenningham, chief global economist at Capital Economics in London.

"Unlike the bubbles in the tech sector in the late 1990s and in U.S. residential property a few years later, a bursting of the bitcoin bubble should not have systemic, macroeconomic implications," Mr. Kenningham added.

"The total value of bitcoin is (still) too small, and it has few links with the wider economy."

Tuesday: Brit-coin

Royal Bank of Canada expects Britain's report on consumer prices to show annual inflation running at 3 per cent in November, but that could mark "the peak in this cycle."

Wednesday: Hawks and swans

Analysts believe a hike in the Federal Reserve's key rate is virtually guaranteed, an increase of one-quarter of a percentage point.

Today's decision brings more than just the statement. It includes projections from members of the federal open market committee, the U.S. central bank's policy-making group, and a news conference with Ms. Yellen.

Economists expect there could be slight changes, but nothing huge.

"The FOMC is widely expected to raise policy rates 25 basis points [this] week, for the third time this year and fifth time since rate hikes started two years ago," said Michael Gregory, BMO's deputy chief economist.

"The market is pegging the odds (at least) at 92 per cent. And, all eyes will be on the statement, summary of economic projections (SEP) and chair Yellen's swan-song press conference for clues to Fed policy in 2018."

Federal Reserve Chair Janet Yellen participates in a moderated discussion at New York University’s Stern School of Business, Tuesday, Nov. 21, 2017, in New York

The pump will be primed earlier in the day when a report on consumer prices puts annual inflation at an expected 2.2 or 2.3 per cent in November.

"That said, underlying momentum in consumer prices will likely remain muted," said Royce Mendes of CIBC World Markets.

"Consumer prices will need to pick up the pace next year for the Fed to continue on its normalization path after a hike [this] week," he added.

Britain also releases its jobs report, which RBC believes will show unemployment steady at 4.3 per cent.

And on the corporate front, Empire Co. reports quarterly results.

Thursday: Doves and loons

A big day, this.

Bank of Canada Governor Stephen Poloz speaks to a midday Toronto crowd, then holds a news conference, giving him the opportunity to expand on last week's cautious stance as the central bank held its key overnight rate to 1 per cent.

Bank of Canada Governor Stephen Poloz speaks at a news conference after release of the financial system review in Ottawa, Nov. 28, 2017

"Look for him to remain cautious given the uncertainties, but in no way more dovish than [last week's policy] statement," said Benjamin Reitzes, BMO's Canadian rates and macro strategist.

Watch the Canadian dollar, too, the Bank of Canada statement having driven down the loonie last week.

Today also brings that key quarterly report from Statistics Canada, and we'll find out just how deep in debt we are.

Note that along with debt to income, RBC also projects that "moderate gains" in assets and net worth left the debt-to-assets and debt-to-net worth ratios close to their second-quarter levels of 16.5 and 19.8 per cent, respectively.

Just after that report, we'll get CREA's latest monthly report and updated forecasts.

Today also brings a look at how Americans were shopping in the run-up to the holiday season, with the rise in November retail sales forecast to come in at about 0.3 per cent.

Overseas, it's Central Bank day in Europe, where both the Bank of England and the European Central Bank are expected to do nothing of note. But, as always, it's all in the language and the signals.

The Bank of England is expected to hold its key rate at 0.5 per cent after it raised it last time out, for the first time in 10 years.

And "while the ECB is unlikely to make any changes at its meeting on Thursday, we expect it to confirm that corporate bonds will make up a greater share of its asset purchases next year," said Jessica Hinds of Capital Economics.

There's also a rate decision in Mexico, where Capital Economics expects the key rate could jump by a quarter of a percentage point, to 7.25 per cent, as the new central bank governor "may favour cementing his inflation-fighting credentials in his first meeting."

And finally, a handful of quarterly results: Adobe Systems, Oracle Corp. and Transcontinental Inc.

Friday: A breather

Investors sure will need a breather after that jam-packed Thursday.

Besides Japan's Tankan survey, at this point there's really just Statistics Canada's monthly manufacturing report to watch for.

CIBC expects to see that factory sales jumped 1.8 per cent in October, though other economists forecast something less than that.

"Growth in manufacturing output will be the first good signpost for October monthly GDP, and the outlook for the decisive fourth-quarter picture for the Bank of Canada," said CIBC's Nick Exarhos.

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