Australia housing, a Canadian warning

Posted: May 12, 2017 in Uncategorized

Canada is very similar to Australia and the countries usually follow each other, economically.

I was following the developments, but then I found this beautiful article from Annie Zhao, fixed income director of Mason Stevens…that explain it easily.

Canada is even more crazy about real estate than Australia and it starts to show.

And now you start to understand why the Government is hitting at the bank with a new levy. Gouging on the housing boom they increased the exposure of the entire Australian economy to potential devastating effect – and now the Government wants them to share the responsibility (they will still pass on the tax increase).

If the Government will not start fixing the issue…that is the direction that will lead to a housing crash.


Six of Canada’s largest banks have just had their credit ratings downgraded by Moody’s on concern that over-indebted consumers and high housing prices have left lenders vulnerable to potential losses on assets. The reasons given will sound eerily familiar to an Australian audience.  


Toronto-Dominion Bank, Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada and Royal Bank of Canada had their long-term debt and deposit ratings lowered one notch. Moody’s also cut Canada’s Macro profile to “Strong +” from “Very Strong-“.


The downgrade left Toronto-Dominion with a long-term debt rating of Aa2. The other five banks had their ratings lowered to A1. Moody’s said it still has a negative outlook on all six banks.


“Expanding levels of private-sector debt could weaken asset quality in the future,” Moody’s wrote in its statement. “Continued growth in Canadian consumer debt and elevated housing prices leaves consumers, and Canadian banks, more vulnerable to downside risks facing the Canadian economy than in the past.”


Canada’s private-sector debt increased to 185% of GDP at the end of last year. House prices have climbed despite efforts by policymakers to cool the market. Business credit has grown as well. “We do note that the Canadian banks maintain strong buffers in terms of capital and liquidity,” Moody’s said. “However, the resilience of household balance sheets, and consequently bank portfolios, to a serious economic downturn has not been tested at these levels of private sector indebtedness.”


Other problems have occurred. On 26th April, the stock of Home Capital Group, Canada’s largest non-bank mortgage lender, cratered by over 60% after the company disclosed that it struck an emergency liquidity arrangement for a C$2 billion credit line (on punitive terms) to counter evaporating deposits.


By increasing the cost of funding the latest moves may help spark a cooling in Canada’s overheated housing market, although overseas buyers remain a significant force. Similar to the Sydney and Melbourne residential markets, wealthy overseas investors in China and elsewhere have been stashing cash into mainly Vancouver and Toronto real estate.


Canadians’ confidence in housing is sky-high. The latest Bloomberg Nanos Consumer Confidence Survey found that 48.5% of Canadians expect house prices to rise over the next six months, the highest level recorded by the survey since 2008. Fewer than 11% expect to see house prices decrease. Canadian policymakers have been sounding warnings and trying to cool down the market by introducing a new foreign buyers’ tax and rent controls.

In the latest Bank for International Settlements (BIS) quarterly report, Canada was singled out for having one of the highest credit-to-GDP gaps among developed nations (see first chart). This measure is defined as the difference between the credit-to-GDP ratio and its long-term trend. The BIS also monitors real residential property prices (second chart), with Canada outpacing other developed markets, including Australia.


China’s credit-to-GDP gap is higher at 26.3%, but Canada’s 17.4% figure is up from last year and well above the closely watched BIS threshold of 10%. The BIS report said debt service ratios are at manageable levels for most countries provided there are no changes to interest rates. However, Canada is flagged alongside China and Turkey as countries that face “potential risks” under more stressed conditions that assume a 250 basis point rise in interest rates.


That said, the big Canadian banks are still in a reasonably solid financial position, and the smaller alternative mortgage providers only cater for about 13% of the total Canadian mortgage market. However, the latest news is a wake-up call for people thinking of investing in overheated property markets and for Australian banks to limit their residential exposures.


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