Category Archives: debt

7 Canadian banks get negative outlook

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
-Toronto-Dominion Bank

Full article in the Globe and Mail.

 

Ready for a 25% off sale?

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.

 

RBC: No Toronto Condo Bubble

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.

Canada house price crash a certainty

Happy day after the new mortgage rules come into effect!

Even before these rules were announced we saw a ‘softening’ in the Vancouver real estate market.

Prices have drifted down as of late and sales are at an all-time-low and inventory keeps growing.

..Yet there are still those that believe ‘it’s different here’.

We saw housing bubbles grow all around the world and pop one by one, but we went through the same steps of pumping up cheap credit to build the house of cards higher.

Check out this post on Alphahunt about Why a Crash in Canadian House Prices is Certain.

What’s amplified our current RE cycle is that credit was steadily made cheaper & easier throughout the boom period – and especially when the RE market suffered in 2008. After finally waking up and seeing the monster they helped create, the Gov’t is making lending rules stricter. Lending practices should not have been made so loose to begin with. And their meddling in 2008 only delayed the inevitable bust.

Today, we’re still at extreme unaffordability and there is no such thing as a ‘soft landing’ or ‘small correction’ for Vancouver RE. Any asset that has seen a price rise of at least two standard deviations above long-term valuation ratios has always mean reverted. If the Vancouver RE market did not return to the normal multiple of income and rent, it will be the first time in history. You can’t binge drink and avoid the hangover. Timing the start of the hangover is always challenging, but what we know with high probability is that there will be a hangover.

 

New mortgage rules make buying hard

How’s this for an opener:

While the country’s new mortgage rules are meant to cool the market, eventually making housing more affordable, they’ve put home ownership out of reach for many prospective buyers.

Uh-huh. And what if the problem was that we put home ownership in reach of too many prospective buyers?

Those who don’t have a down payment of 20 per cent or more will be limited to a maximum amortization period of 25 years. Since 40 per cent of new mortgages last year were for 26 to 30 years, according to a survey from the Canadian Association of Accredited Mortgage Professionals, real-estate neophytes might feel the change most dramatically.

WHoa! Did they just say 40 percent of new mortgages were over 25 year amorts?

Another new rule announced by Mr. Flaherty sets the maximum gross debt-service ratio – the percentage of household income being used to pay for housing – at 39 per cent so buyers will be less likely to take on mortgages that are too big and could leave them floundering if rates increase.

That’s the one that Andrea Benton, a 37-year-old entrepreneur in North Vancouver, B.C., said hits her family of four hardest.

“It means my total family income would have to be an exorbitant amount to afford an $800,000 house,” she said.

You mean you’re expected to have a high income to afford an $800,000 house?!?

Read all the comedy in the full article here.