Standard and Poor’s have downgraded their outlook for 7 Canadian banks from stable to negative.
And what has motivated this downgrade?
High housing prices and consumer debt.
Now you can bet that S&P are aware of the CMHC and the backdoor bank bailout, but when things get this out of balance there is a spill-over effect. If you can’t pay the mortgage you probably aren’t paying the credit card bill either, and there’s no CMHC buying up credit card debt.
“A prolonged run-up in housing prices and consumer indebtedness in Canada is in our view contributing to growing imbalances and Canada’s vulnerability to the generally weak global economy, applying negative pressure on economic risk for banks,” the rating agency stated in its decision. “Growing pressure on banks’ risk appetites and profitability arising from competition for loan and deposit market share could also lead to a deterioration in our view of industry risk.”
The seven Canadian banks with a negative outlook are:
-Bank of Nova Scotia
-Central 1 Credit Union
-Home Capital Group Inc.
-Laurentian Bank of Canada
-National Bank of Canada
-Royal Bank of Canada
Full article in the Globe and Mail.
A day after the RBC released a report saying there is no condo bubble in Toronto we get a conflicting report from Capital Economics.
Not only do we have a housing bubble problem in Canada, it appears to be peaking and bursting right now.
Economist David Madani says get ready for a 25% drop in prices.
The thing people always seem to forget when it comes to housing markets is that they move SLOWLY.
Housing prices typically respond to changes in the market with a lag of five to nine months, according to Mr. Madani. He points out that home sales have already seen material declines, down 4% over the last two months. Vancouver in particular has been hard hit, with sales down 28% year-over-year.
“Overall, the willingness of buyers to pay these historically high house prices now looks to be proving fragile against the increasingly disappointing macroeconomic backdrop,” he said. “The housing bubble in Vancouver already appears to be deflating, with only Toronto defying the inevitable. Accordingly, we expect substantial declines in house prices over the next year or two.”
Check back here in two years to see whose prediction was more accurate: RBC or Capital Economics.
Royal Bank says everyone should stop worrying about the condo bubble in Toronto.
Policy makers in Ottawa and various economists just need to chill.
There is no Condo Bubble in Toronto.
Can someone ask them about Vancouver?
There are more condos under construction in Toronto than any other city in North America, and more residential building is taking place in the Greater Toronto Area than ever before.
Mr. Flaherty’s fears about overpriced real estate, and condo markets in particular, prompted him to surprise the market last month with new mortgage insurance rules that aim to take some of the wind out of the market’s sails. He’s trying to engineer a gradual slowdown of the market, fearing that otherwise it could crash at some point.
Mr. Hogue’s lack of concern about a bubble does not mean he thinks the market will boom, however. He expects condo prices to fall by perhaps 2 per cent to 7 per cent from their peak. He predicts that a two-tiered market could emerge, with condo prices softening while the market for single-family homes is resilient.
Full article in the Globe and Mail.
So we’ve gotten to the point where it’s pretty unanimously agreed that real estate in Toronto and Vancouver is over-valued and due for a correction.
The question now is what sort of an end to this housing boom we will be looking at.
Will this be an explosive toppling of values, a market that runs head first into a wall, or will it be a simple slow leak for years and years?
..And which would be better?
You can add David Rosenberg to the list of people that say ‘whimper, not bang‘.
His latest comments fall into the ‘not a bubble, a balloon’ camp:
“Prices are starting to deflate by 0.8% YoY, though more like air coming out a balloon slowly than a giant pop,” wrote Rosenberg Tuesday in his morning note.
“It is gradually becoming a buyer’s market with the inventory of unsold homes rising to six month’s supply, which is at the edge of a balanced market.”
Of course most of that drop nationally is being driven by Vancouver where everything is falling fastest. What remains to be seen is whether the current drop will remain even or accelerate.
If you’re wondering why we haven’t heard as much about wealthy chinese buyers lately as prices drift down in Vancouver, maybe it’s because they’re moving to the USA.
“California has always been popular with Asian buyers,” he told beyondbrics. “But whereas before it was mainly buyers from Taiwan, Hong Kong and Japan, now we are seeing more mainland buyers visiting.”
Reasons for purchases vary, say those who have dealt with overseas Chinese buyers. Some are buying because they want to emigrate or they have children who will go to school in the US. More and more Chinese millionaires are looking to settle in the US or at least secure residency rights.
And why would they be buying in the US as opposed to Canada?
Others buy because the numbers add up: the renminbi is relatively strong against the US dollar and property prices are cheap compared to Australia or Canada.
But it’s not supposed to work like that! Wealthy people aren’t supposed to look for good deals..