Canadian households dodge U.S.-style credit woes - No Sub-Prime Crisis in Canada

Hi All,

Here is confirmation of what I have been saying since the sub-prime situation arose in the US. Canada is not going to have a sub-prime mortgage crisis because sub-prime mortgages were never allowed here in Canada. Read on and let me know your thoughts.

ROMA LUCIW

Globe and Mail Update

March 26, 2008 at 3:00 PM EDT

Canadians have dodged the severe credit woes gripping the U.S., where the collapse of the mortgage market has triggered rising delinquency and foreclosure rates and left households saddled with debt, says a report from CIBC World Markets.

The author's report, CIBC senior economist Benjamin Tal, maintains that the credit crunch has not affected the Canadian household credit market in a significant way. And although he expects the U.S. economic downturn will spill across the border and curb consumer spending, Canada will escape the bulk of the carnage.

“It would be naive to assume that the Canadian consumer will totally escape this U.S. credit crunch and weakening American economy, especially in Ontario and Quebec,” Mr. Tal said in an interview. “But it is a question of degree. The likelihood of a consumer-led recession in Canada is very, very remote at this point, because consumers did not get into the same kind of trouble as in the U.S.”

In his mind, the reasons for Canada's more solid credit situation is twofold. “First of all, the Bank of Canada has been very active in cutting interest rates, which has eliminated some of the damage coming from the credit crunch,” Mr. Tal said. “So, if you are a regular person with relatively reasonable risk profile, you probably don't feel the credit squeeze because the rates have not changed in a significant way.”

The other reason is that in the U.S., the kind of high-risk borrowing that characterized the subprime mortgage market made up a significant portion of the credit landscape. In Canada, that type of borrowing was small and has had only a marginal impact on the overall housing market and consumer credit situation.

To date, Canada's mortgage market has stayed defiantly healthy, with the pace of growth in overall residential mortgages outstanding rising by 13 per cent last year, up from 10 per cent growth in 2006, the CIBC report said. Furthermore, data suggest that activity levels remain “very strong” in the first two months of 2008, a direct contrast to the sharp downturn in the United States.

But with economic growth and the housing market set to cool from last year's strong levels, Mr. Tal expects that the overall growth in mortgages outstanding in 2008 will be roughly 8 to 9 per cent.

The U.S. is in the throes of the first consumer-led recession since 1992, Mr. Tal said. The collapse of the housing market, which has been an extremely important factor for the U.S. economy and consumer spending, and the falling stock market are both lowering the wealth effect.

At the same time, the “quality of borrowing in Canada has stayed much better than in the U.S.,” Mr. Tal said.

The arrears rate on mortgages in Canada, which is still “extremely low” at 0.26 per cent, is also forecast to trend higher in the next year. However, a strong jobs market will underpin the economy so that the rate will likely remain low by historical standards, Mr. Tal said.

There has been a rebound in both direct loans and personal lines of credit recently. Overall growth in consumer credit remains strong, rising nearly 11 per cent in 2007, with personal lines of credit dominating growth, the report said. It noted, however, that delinquency rates in the direct loans portfolio are starting to show a “modest” tick higher.

“When adjusted for inflation, credit growth during this cycle was not as strong as in previous cycles,” Mr. Tal said in the report. “This means that any softening in the pace of household borrowing in 2008 will not be as dramatic as in the past.”

Canadian households are juggling higher levels of debt. Overall debt rose 3 per cent in the fourth quarter of 2007 while personal disposable income climbed 1.6 per cent.

The recent drop in stock markets, combined with a slower pace of increase in home valuations, led the debt-to-asset ratio to climb in the fourth quarter of 2007 to 17.1 per cent, its first increase since early 2006, the CIBC report said. Over the past year, the debt-to-income ratio in Canada edged up from 122 per cent to 130 per cent.

“At the same time, the debt service ratio, as measured by debt interest payments as a share of disposable income is still about 30 basis points higher than it was in 2006,” Mr. Tal said. “With widening credit spreads offsetting the declines in both prime and government bond rates, debt interest payment will remain relatively stable over the next few months.”

The number of consumer bankruptcies, which climbed by a mere 1 per cent during the year ending January 2008, is forecast to pick up by as much as 5 per cent this year as the slowing U.S. economy impacts growth in Canada, according to the CIBC report.

Bank of Canada says Canada's Fine in Global Credit Crunch

Hi All,

Here's more evidence that the sub-prime crisis will not have much effect on us here in Canada. You can thank Canada's regulated financial system system that didn't allow sub-prime mortgages and 100% financing for keeping us in good stead. Then again, is it really worth the years of sub-standard customer service from the big banks?

I'd love to hear your thoughts.

Consumers, banks to feel pinch

HEATHER SCOFFIELD

Globe and Mail Update

June 12, 2008 at 10:40 AM EDT

OTTAWA — The global credit crunch has not hampered credit growth in Canada, but banks and household finances will likely feel pinched in coming months, the central bank says in a new assessment.

Global credit markets are still under stress, and spreads won't recede much until well into next year, the Bank of Canada said in its twice-yearly Financial System Review, and both the banking system and consumers remain vulnerable.

“Although there has been some improvement in conditions over the past several weeks, strains in global credit markets have broadened since December,” the review said.

Canadian banks have generally remained solid throughout the past 10 months of turmoil, and are able to tap markets to finance their shortfalls. Plus, they have continued lending to Canadian borrowers, albeit with different types of credit instruments that generally cost borrowers more.

But bank balance sheets “may experience further pressure,” the review stated.

That's because banks in Canada are more exposed to U.S. assets than banks in any other country. And the United States continues to have significant problems, both in financial markets and in its economy.

So Canadian banks will likely see their profits squeezed further, the review warned. Revenues from investment banking will likely fall, since the lucrative securitization market is not functioning. Loan-loss provisions are on the rise. And the financial position of Canadian households and businesses outside the finance sector is deteriorating.

Indeed, Canadian consumers are increasing their household debt levels, and finding that debt more expensive to service, the review showed.

Debt as a proportion of income has climbed steadily for the past 20 years, and now, debt is 131 per cent of income, the review points out.

At the same time, higher mortgage rates have pushed up the cost of carrying a growing debt load. The debt-service ratio was 7.7 per cent at the end of 2007, compared with 7.3 per cent in the middle of last year, just before the credit crisis erupted.

And the number of vulnerable households, with very high debt-service ratios, has climbed recently.

As the housing market comes off its recent highs, Canadian households are poised to feel a bit poorer, especially in Western Canada, the review warned.

“With possible further decreases in financial asset prices and continued slowing in house price increases, the financial position of the Canadian household sector is likely to deteriorate going forward.”

Still, the Bank of Canada is not too concerned. Net worth rose 6.4 per cent in the second half of 2007. Loans in arrears are still at historically low levels. And the personal bankruptcy rate is stable.

“Aggregate indicators of household financial stress continue to suggest that the Canadian household sector is in good financial health,” the bank says.

Consumers and banks are well positioned to handle a bit of deterioration, the central bank said, but their mild discomfort will quickly become intense pain if the U.S. downturn turns into a protracted recession.

That probably won't happen, the bank added, but if it does, the implications for Canada are major.

A long U.S. recession would bite into financial market liquidity again, and force another round of de-leveraging, as well as a “sharp” drop in the U.S. dollar. The effects would spill over into the rest of the world through trade and through financial markets. Commodity prices would be vulnerable.

For Canada, this scenario would mean lower profits for exporters and a spill-over effect on the broader Canadian economy. Banks would have to take further writedowns, while their loan losses would rise, and their capital ratios would be hard hit.

Credit conditions for Canadian businesses and consumers would tighten significantly, defaults would rise, and consumer wealth would drop, especially in the West.

“While the probably of such outcomes materializing is relatively low, they nonetheless warrant careful consideration by financial institutions because of the potentially large negative repercussions,” the central bank said.

IMF says Canadian Real Estate Market is Undervalued

Hi All,

I have noticed as of late that some buyers have been spooked by whats happening in the US. Fortunately the sub prime crisis will not happen here in Canada.

Have a look at the at this article sourced from the International Herald Tribune originally from the IMF.

It basically says that a lot of housing markets around the world are overvalued, but that Canada's is UNDERVALUED! Read on folks!

As a weakening housing market appears to be dragging the U.S. economy into recession, the International Monetary Fund warned this week that home prices in other industrial countries were even more overvalued.

In its World Economic Outlook report, the IMF also concluded that central banks should pay close attention to home prices and consider raising interest rates when prices are rising rapidly. That conclusion is directly contrary to the established policy of most central banks, including the U.S. Federal Reserve Board, which ignores home prices when they are expanding.

In the current credit crisis, which began with problems in the subprime mortgage market, the Fed has moved aggressively to lower interest rates.

"A central bank that wants to stabilize the economy is better served by responding to house prices, both when they go up and when they go down," said Roberto Cardarelli, a senior economist with the IMF. He said that was particularly important in countries with relatively open mortgage markets, like the United States, which make it easy for homeowners to get access to cash when prices are rising.

The fund looked at trends in housing prices and mortgage debt in 17 countries, and attempted to assess how much of the price changes could be attributed to economic fundamentals, including trends in personal income, demographics and interest rates. It concluded that in mid-2007, house prices in the United States were 11 percent higher than fundamentals would justify.

That overvaluation was barely a third as high as in Ireland, where the IMF estimates that house prices were 32 percent higher than fundamentals would support. The Netherlands, Britain, Australia, France and Norway all showed overvaluations of at least 20 percent.

On the other end of the spectrum, the IMF concluded that homes were undervalued in Canada and Austria.

Cardarelli pointed out that, adjusted for overall inflation, home prices rose at a slower rate in the United States in this decade than they did in many other countries, with the mid-2007 figure up 42 percent from the first quarter of 2000. Comparable figures included gains of 95 percent in Spain, 90 percent in Britain and 85 percent in France.

Mortgage debt has shot up over recent decades in many countries, but there remain sharp variations as some markets make it much harder to borrow or restrict the loan-to-value ratio of mortgage loans.

In the United States, total mortgage debt more than doubled, as a percentage of gross domestic product, going from 34 percent in 1983 to 45 percent in 1990 and then to 76 percent in 2006. But the increases were much greater in some countries. In the Netherlands, the mortgage indebtedness hit 98 percent of GDP, and in Denmark it rose to 101 percent.

Perhaps not coincidentally, when the IMF put together an index of mortgage markets, the most liberal in terms of lending standards was the United States, followed by Denmark and the Netherlands.

A High Canadian Dollar Means Low Inflation Paving the Way for Low Interest Rates - Great for Vancouver Real Estate

I know alot of people are feeling the pinch of higher fuel prices, but a high oil price is very good for Western Canada and Vancouver Real Estate in particular.

The Canadian Dollar has been pushed up by high energy prices as the US dollar has sunk because of the Sub-Prime Crisis and their high current account deficit. Canada is the number one exporter of energy to the US and 80%+ of Canada's imports come from the US.

High energy prices push up the Canadian Dollar which makes US imports cheaper which then pushes down inflation in Canada. With low inflation, the Bank of Canada can reduce interest rates thus making Real Estate in Vancouver less expensive for Buyers and giving them an incentive to purchase more Vancouver Real Estate.

I'd love to hear your comments!

Loonie holds above par with greenback

VIRGINIA GALT

Globe and Mail Update

May 16, 2008 at 9:23 AM EDT

A strong Canadian loonie was over par with the United States dollar Friday morning, up to $100.34 (U.S.) in early trading, fuelled primarily by high oil prices and generally positive Canadian economic news.

The Canadian dollar opened at 99.92 cents, after briefly nudging above parity overnight, and quickly regained its ground.

“Probably this latest move is just on the back of oil prices moving higher again,” said Camilla Sutton, a currency strategist with Scotia Capital Inc.

As well, she said, “most of the data, with the exception of manufacturing shipments, has been somewhat positive for Canada.”

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However, Ms. Sutton did not foresee any major spikes in the near term. The Canadian dollar last traded above par with the U.S. dollar on March 19, when it swung from a low of 98.34 to a high of 101.21 in highly volatile market activity.

“The general sentiment is that we are in this broader range on either side of parity, and we haven't really seen a catalyst yet to break us out,” Ms. Sutton said.

“All in all, we are hovering around parity, but it certainly seems like the Canadian dollar wants to be a little bit stronger than the current levels.”

Still, she added, the “broader six-month range of the Canadian dollar is still very much intact, either side of parity.”

David Watt, a senior currency strategist with RBC Capital Markets, said the Canadian dollar is finally reflecting high oil prices, and a recognition that oil prices are not just moving up because the U.S. dollar is weak.

There is evidence that demand for oil “is still strong enough, despite what is going on with the U.S. dollar,” said Mr. Watt.

Meantime, the U.S. dollar fell against most major currencies Friday.

The euro bought $1.5476, up from the $1.5454 it bought late Thursday in New York.

The British pound bought $1.9479, up from the $1.9451 it bought late Thursday, while the dollar also fell against the Japanese yen, buying 104.75 yen, compared with the 105.26 yen it bought late in New York.

“The dollar is looking slightly weaker on the back of yesterday's manufacturing data but there hasn't been too significant a slump in the greenback so far,” said James Hughes, an analyst at CMC Markets in London.

Interest Rates Fall! More good news for Vancouver's Property Market! Central bank cuts interest rates as high loonie, credit turmoil raise fears

Pressure on the Central Canadian manufacturing sector from the high loonie has prompted the Bank of Canada to reduce rates.

This great for Vancouver's real estate market.

We don't have Central Canada's problems with the high loonie stemming from being integrated with US manufacturing. BC's & Vancouver's economy are some of the strongest in Canadeqa. Lower interest rates make real estate more affordable by giving buyers more spending power.

Keep you fingers crossed for more good news from the Bank of Canada!

HEATHER SCOFFIELD

Globe and Mail Update

December 4, 2007 at 10:20 AM EST

OTTAWA — The high Canadian dollar and turmoil in credit markets have prompted the Bank of Canada to cut its key interest rate by a quarter point.

Just months after the central bank indicated that it was on a course of hiking interest rates, it announced Tuesday it has changed direction, lowering its target rate to 4.25 per cent.

The move indicates that the central bank fears the Canadian economy is about to be sideswiped by a rapidly slowing U.S. economy and tighter credit conditions caused by financial market turmoil.

While Canada's economy is growing steadily right now, inflation is much softer than the central bank had projected earlier this fall. Total inflation was 2.4 per cent in October, and core inflation (which excludes the most volatile items) was 1.8 per cent, on a year-over-year basis.

Bank of Canada Governor David Dodge is seen leaving the central bank in Ottawa in this file photo. (Reuters)

Plus, the Canadian dollar unexpectedly spiked well above parity in early November, hurting exports and pushing down domestic prices, further taking the steam out of inflation, the bank said.

At the same time, financial markets around the world are struggling to come to terms with the U.S. sub-prime crisis, and have not been able to re-evaluate structured financial products, the central bank said in a statement.

Following the rate cut, the Canadian dollar fell more than a full cent, trading at 98.74 cents (U.S.) from Monday's close of 99.98 cents. Lower interest rates tend to diminish the allure of a country's currency,

The headwinds facing the Canadian economy have worsened since October and will likely drag on, pushing up bank funding costs, tightening credit conditions, and punishing the U.S. economy, the Bank of Canada noted.

“All of these factors considered, the bank judges that there has been a shift to the downside in the balance of risks around its October projection for inflation through 2009,” the bank's statement concludes. “In light of this shift, the bank has decided to lower the target for the overnight rate.”

A rate cut acts as an insurance policy, said Jacqui Douglas, economic strategist at TD Securities.

“While the Canadian economy is not yet showing any significant signs of strain, it's unlikely that it can keep growing at an above-potential rate for much longer, given the headwinds that it's encountering,” she wrote in a commentary.

It was no doubt a tough call for the central bank. Markets and economists have been divided on whether the central bank should stand pat or cut its key rate. The so-called shadow monetary policy council, run by the C.D. Howe Institute, recommended no cut, although the call was by no means unanimous.

“We think the Bank of Canada is at a difficult crossroads, and a mistake at this juncture could prove costly in the medium term,” foreign exchange analysts at the Bank of Nova Scotia said Tuesday.

Economists believe generally that if central banks wait too long to respond to a slowdown, they will be forced to make radical rate cuts to put the economy back on track.

Political pressure on the central bank to cut rates has been rising. The premiers of Ontario and Quebec have complained loudly that the high Canadian dollar is putting too much strain on their export-oriented economies.

Monday, organized labour and company executives in the manufacturing sector took the rare step of issuing a joint press release to urge the central bank to cut rates.

But at the same time, the Canadian economy is still in overdrive, the central bank says, and the job market is booming – posing risks for inflationary pressure.

In its statement, the Bank of Canada did not give many hints about whether it would continue to cut rates next year. Rather, it said it would take stock of the economy and financial market conditions again in January to make a new assessment.

Tuesday's announcement is the first time since April 2004 that the central bank has cut its key interest rate. After that time, the Bank of Canada gradually raised rates from a low point of 2 per cent, reaching all the way up to 4.50 per cent by July 2007. Rates have been on hold since July, until now.

With a file from Tavia Grant.

The Froth is Off, But Vancouver's Real Estate Market is Still Goo

Hi All,

I have been noticing a change in my business. The mix of clients is shifting and the number of sellers I am working with has increased substantially. There are still buyers, but compared to this time last year, there are significantly less.

Its not a correction in the market, but a gradual shift away from a total sellers market, which is good for buyers and not a problem for sellers who are willing to take efforts to make their home look good and price it according to market conditions.

This article summarises nicely what I have been experiencing.

I'd love to hear your thoughts.

Cracks appear in the real estate market

VIRGINIA GALT

Globe and Mail Update

May 15, 2008 at 9:39 AM EDT

The Canadian housing boom is ending, but there is no “major correction” in the cards – and buyers are unlikely to see anything near the bargain-basement prices that currently characterize the United States housing market, the Bank of Nova Scotia said Thursday.

“After many false calls, there is now convincing evidence that Canada's housing market has come off the boil,” the Bank of Nova Scotia in a report on real estate trends.

Canada Mortgage and Housing Corp., in its second-quarter outlook, reported Thursday that new home construction will begin to slow in 2008, “but remain high by historical standards.”

Both Scotiabank and CMHC said the Canadian housing market is fundamentally strong.

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However, higher mortgage carrying costs “will be a catalyst for the decrease in residential construction to 214,650 units in 2008, from 228,343 in 2007,” CMHC said in its second quarter housing market outlook.

Bob Dugan, CMHC's chief economist, added that most of the pent-up demand that built up during the 1990s “had now been fulfilled and residential construction activity will gradually move in line with Canadian demographic fundamentals.

“These factors will continue to exert downward pressure on housing starts, which will decline to 199,900 units in 2009,” Mr. Dugan said.

Scotiabank, looking at the resale market, reported that home resales – having fallen for four consecutive months – are running about 15 per cent below last summer's historic peak.

“Average annual home price appreciation has eased back into the mid single digits, as overall market conditions come into better balance,” according to the Scotiabank report.

“Adjusted for inflation, the average resale home price in Canada registered its first quarterly decline in seven years in the first quarter of 2008,” the bank said.

However, senior Scotiabank economist Adrienne Warren said in an interview that the softening market is due to a “cyclical slowdown,” and the Canadian housing market is “fundamentally stronger than the situation we're seeing in the U.S.”

The cooling could bring eventually price relief to buyers, she said.

“The market is becoming better balanced, so there will be more homes listed, which takes a little bit of pressure off prices,” Ms. Warren said.

“But it will take some time, and a number of years of fairly soft prices, in order to bring affordability back to the levels” that are typically seen at the beginning of an upward cycle, she said.

CMHC forecast that existing home sales, as measured by Multiple Listing Service, will fall by 8.5 per cent in 2008 to 475,900 units, and the trend will continue in 2009, with a decrease to 465,000 units.

“Despite a slowdown in MLS(R) sales, demand remains strong by historical standards,” CMHC wrote. Average resale prices will increase by 5.1 per cent to $323,000 in 2008, and by 3.3 per cent, to $333,500 in 2009, CMHC projected.

In line with the CMHC report, Scotiabank noted that “cracks are appearing on the new home front as well.

“While housing starts in early 2008 are essentially tracking last year's elevated levels, demand for new residential building permits has fallen sharply. Price increases for new homes are moderating, while inventories of unsold new homes are trending higher.”

Ms. Warren said she expects overall sales volumes in 2008 to be about 15 per cent below last year's record levels, and home prices to increase on average by about five per cent.

“Price gains should slow further in 2009 with the return of a balanced market for the first time in a decade. Meanwhile, housing starts are projected to gradually moderate, returning toward underlying annual household formation levels of around 180,000 by the end of the decade, from the current 225,000 unit range,” Ms. Warren said.

The report also notes that the cooling in overall activity is most pronounced in many of Canada's hottest urban housing markets in recent years, including Calgary and Edmonton.

“Both centres have officially moved into buyers' territory as soaring prices weaken demand and fuel new listings. More generally, however, economic conditions continue to favour the resource-rich markets in the West over manufacturing-dominated centres in Central Canada. Regina and Saskatoon are currently in the strongest sellers' position nationally, supported by good affordability, rising population inflows and tight supply,” according to the report.

However, risk of a major correction is low, Ms. Warren said.

“Home prices in Canada are not substantially overvalued. Our long-term housing price model puts average home prices in 2007 at about eight per cent above their long-term trend, compared with a premium of 12 per cent and 18 per cent, respectively, at the 1976 and 1989 housing cycle peaks. Recent International Monetary Fund (IMF) estimates placed Canada at the bottom rungs of international home price overvaluation.”

Scotiabank also said in its report that Canada's real estate market is not overbuilt.

“While inventories of unsold homes are trending higher, the number of unabsorbed units, including condominiums, remains well below prior cyclical peaks in most major centres. Tighter lending guidelines and high construction costs have likely contributed to a more cautious approach among builders.

Overall mortgage quality is still sound, Scotiabank said.

“Canada does not have ultra-low teaser rate mortgages that have contributed heavily to U.S. defaults as they reset. Adjustable-rate mortgages, sub-prime lending, borrowing against home equity, and insured investor mortgages all account for a much smaller share of the Canadian mortgage market than in the United States,” the report said.

At the end of the day, we predict a soft landing for the Canadian housing market, with somewhat lower sales and construction, and a period of relatively flat inflation-adjusted home prices,” added Ms. Warren. “While underlying domestic housing fundamentals remain healthy, a major risk to the outlook would be a deeper and more protracted downturn in the U.S. economy, with more serious repercussions for domestic output, employment and income growth.”