Is It Canada's Turn to Flounder?

[CanadaSue]

We've been watching events in the US, Europe & throughout much of the world with more than a little apprehension. Unfortunately, we've also collectively, (Joe Public), been a bit smug & self righteous. "Can't/won't happen here!"

It may be about to happen here. Thankfully, we didn't see the same mortgage shenanigans with subprime you folks experienced although there was a small amount of that. But while bank regulators were keeping a close eye on mortgages, they dropped the ball on personal debt of all sorts. Our family is close to the bottom of the income totem pole. BUT - we have available to us, an amount of credit that I KNOW would sink us into bankruptcy within a few months if we used even half of it. Until a few days ago, we were carrying a debt burden we've been struggling with for years. We'd reduced it by almost half but it was still onerous. Thanks to an unexpected legacy, we are now in a position to be completely debt free by summer. Carrying that debt taught us a lot about money management - the hard way. To be honest, maybe we needed to learn the hard way. We'll never forget the struggle & how it prevented us from enjoying so much life has to offer. Worse, there's an unspoken 'interest' on high debt levels... the constant stress knowing you're one emergency away from disaster.

I thought we were part of a small, exceptionally stupid minority, (much of the debt was stupid debt), but it seems that's not the case. Canadians to my horror are saddled with an average debt ratio of 153%:

***Canada’s soaring household debt ‘is going to end in tears’***


http://www.moneyville.ca/article/112...ebt-cliff?bn=1

People are struggling now & this against a background of almost record LOW interest rates. The central bank can't hold rates that low forever & when rates start to rise, no matter how incrementally, people are going to go down. It's bad enough that consumer prices are galloping upwards. Grocery shopping is starting to feel like walking into a store along Rodeo Drive. Gas prices - groan. There are deals out there - good deals as people have put the brakes on shopping but man, you have got to be careful.

Housing is another issue. As this article:

***Rental markets: Canadian mayors warn Ottawa of drastic rental housing shortage***

http://www.thestar.com/business/arti...?bn=1#comments

points out, rental housing in becoming increasingly scarce. It's easy to understand why. There's little incentive to be a landlord or remain one & as a result, we're using more units every year & few new ones are being built. We're lucky. This province benefits from a variety of rent control - increases are controlled in older buildings although for new tenents, the landlord can charge whatever the market will bear. The longer you remain in a unit, the less you end up paying compared to new tenents, year over year. I was stunned to find out my small city, because it has a less than 1% vacancy rate - 0.9%, iirc, has the 3rd highest rental costs in the province. Damned good incentive for us to stay where we are.

With interest rates at near or genuinely historic lows, you'd think potential hoe owners would be leaping into the market. Many would love to but the feeling among housing market pros is that our housig market is currently overvalued to the tune of 10% on average. There are always hot market but overall... And, with people holding record levels of personal debt & a fear that low interest rates won't hold, many are remaining in rental housing.

All the dominoes are in place for trouble here. Our economy contracted in Novemeber - not hugely but just before Christmas? Worrisome.

Buckle up & hold on...

[CanadaSue]

After an appointment earlier today we walked over to a mall where we rarely go to shop. It was dead. Half the storefronts are shuttered & up for lease. Most of the other stores were trying to sell off stock at prices that were staggeringly low. Five pairs of canvas sneakers for $10? Three tee shirts for $10? In a stronger economy, such sales would have left store shelves stripped bare halfway through a salesday. Today, there was more staff than there were customers in that mall.

I kept my hands in my pockets - there was nothing we NEEDED but oh boy if most are approaching shopping like that right now - we're done for. A friend of mine manages a major mens' clothing outlet at our big mall & he tells me it's getting terrifying up there - stores going down left, right & center, monthly & quarterly sales figuring dive bombing for everybody...I did walk into two outlet stores & price things we'll eventually have to replace but I'm talking no sooner than 9 - 12 months from now.. even if then. I just like to keep an eye on pricing so when I DO buy - I don't get screwed.

We're in trouble all right if this trend is reflected across the country - Canada looks to be teetering on a precipice.

[sandyd]

CS, while you avoided some of the types of loans we had here....you didn't avoid a house bubble...home prices that I've seen in Canada are not 3x normal salaries but many more times and the minute the stores go under, someone is not making the same money and won't be paying mortgage or credit cards.....

what is your bankruptcy like?

Will folks be able to stop paying when the jobs that paid enough to make the bills are gone and have what they owe wiped out?

[CanadaSue]

I have some of those answers & can easily get the rest - but I have some things I've got to do 1st. Answers later his evening.

[Malcolm]

"YES"..........Its the early symptoms.
Sydney is slowwwwly shutting down too.

[dharma]

Are you familiar with the expression "the cleanest dirty shirt in the closet"?

[CanadaSue]

I'd forgotten that expression but yeah, we appear to be one of the cleanest dirty shirts still hanging...

Sandy, some answers:

Housing has always been proportionately more expensive here. The most recent data I found about income to housing price ration for Canada is dated 2 days ago & says on AVERAGE, that figure is 4.9:


http://www.vancouversun.com/business...422/story.html

Housing is overvalued but not bubble type over-evaluation where that sucker is gonna pop. The mavins prefer to refer to a balloon slowly deflating.

Canadian Bankruptcies...we have a bankruptcy filing rate of 3.5 per thousand. The US rate is at 4.7 per thousand. Mind you those data are from 2008 & it's gone up in both countries. Canada's bankruptcies have gone up 116.6% since 1990, well about population increase:

http://www.bankruptcycanada.com/bankstats1.htm

Every 1/4 point rise in interest rates is going to send somebody over the edge. At the time of that last data I referred to, business bankruptcies were down since 1990. I'm pretty sure that's changed although many of our store closings are due to the 'mother company' - US based, going down.

Here's what's going to hurt in the next year or two. Our government wants to cut spending from between 5-10% per government department or ministry. That's not a 5-10% drop in the rate of increased spending or anything else a little weasely but real drops in spending. We can't 'retire out' that many civil servants so there will be significant job losses there.

[sandyd]

income to housing price ration for Canada is dated 2 days ago & says on AVERAGE, that figure is 4.9:

I wonder what is was in say 1970 or 1980 or 1990.....


holy cow, from your link:

Vancouver, the authors say, has had the highest jump in housing prices — up 159 per cent in the last decade — and has seen the price-to-income ratio in the city double to 10.

Read more: http://www.canada.com/business/Housi...#ixzz1lBbb8Ig4

[CanadaSue]

Increasingly, recent press is pointing to trouble:


Canada creates far fewer jobs than expected in January

http://www.cbc.ca/news/canada/story/...e-january.html


Mortgage pullback hints of housing crisis

http://www.moneyville.ca/article/112...isis-in-canada

[veggiecanner]

Here in the states we are being told we are in a recovery, but most of us don't beleive it.

[Ross]

.


Learn from history , become vikings.
Leave that cold wasteland and travel south to rape and pillage your neighbors .




.

[CanadaSue]

Well.. I'll skip the rape if you don't mind but pillage sounds cool.

Meanwhile:

***Electro-Motive plant shut by U.S. owner***

450 good jobs gone.

http://www.cbc.ca/news/business/stor...don-close.html

[Ross]

450 good jobs gone.

I can understand union leaders not having enough education to do
the sums but surely they should have enough common sense to hire
an accountant consultant capable of doing the arithmetic for them .


.

[CanadaSue]

In the first story, a long time bank customer who's never missed a payment, (although he seems to have a fair bit of borrowed money), has been advised his LoC interest rate is jumping from 6% to 9.75%. His is not the only bank re-evaluating the credit status of their customers. Some banks are planning on dropping SOME customers' interest rates. We shall see:

***Customers feel the pinch as banks cut risks***

http://www.theglobeandmail.com/globe...rticle2328581/


Mortgage interest rates have been at historic lows. That's starting to change:

***Banks rolling back mortgage discounts***

http://www.theglobeandmail.com/repor...rticle2328570/

[Ross]

Housing is overvalued but not bubble type over-evaluation
where that sucker is gonna pop

Errr no . Shrinking credit availability says "that sucker is gonna pop"
House prices have been driven by an increase in debt relative to GDP .

Sadly the charts below are somewhat dated .

[CanadaSue]

The buss since mid fall has been that Canadians are finally waking up to their high consumer debt levels. I know the aquisition of new consumer debt has slowed. I'm not sure if we've collectively turned a corner & have started paying it. The really scary aspect is that a lot of debt & negative net worth is in the hands of those in their 40s & 50s - who should be maximizing retirement savings.

[Ross]

Wages seem to have been matching house price increases .



And mortgage debt appears to have stabilized



Consumer credit is plunging ( both good and bad )


Total business credit seems to have recently plunged very sharply


Your banks have been on a capital raising binge ( why ? very interesting ) .


Given that outstanding credit appears to have fallen it is unlikely
the banks are covering new loans so why have they raised the money ?
To rollover existing debt ?? Expecting big losses ?


..

[dharma]

Originally Posted by Ross

Your banks have been on a capital raising binge. (Why? Very interesting.)
Given that outstanding credit appears to have fallen it is unlikely the banks are covering new loans so why have they raised the money? To rollover existing debt?? Expecting big losses?

The Feds have been forcing them to do this for some time now. It's a classic case of government hypocrisy: Obama on TV bitching about how the banks aren't lending, at the same time auditors are pushing banks to increase reserves and tighten up on their loan requirements. Add in interest rates so low that banks can't make a decent return, and a Federal Reserve policy of providing interest on all funds held on deposit there (borrow money from the Fed at 0% interest, then turn around and deposit it back and get paid! Free money!), and it's a wonder the banks are lending at all.

It's gonna get worse:

http://online.wsj.com/article/SB1000...445858574.html

If you like comedy:

http://www.newyorkfed.org/research/s...orts/sr380.pdf

[Brihard]

Dharma, pretty sure he's speaking of Canadian banks. Our financial system remains sound, and is on a more stable economic foundation. They've been making strategic acquisitions - particularly south of the border - at a rapid pace. I think much of their capital raising will probably be found to have something to do with leveraging the combination of current low rates and very cheap valuation of assets they wish to acquire.

[Ross]

All charts and comment refer to Canada .

[dharma]

Duh. Apologies.

[Ross]

New house price index





http://www.statcan.gc.ca/daily-quoti...20209a-eng.htm

[Ross]

Retiring with debt

2009

In 2009, 34% of retired individuals aged 55 and over, whether single or in a couple, held mortgage or consumer debt.
The median amount owed by these individuals was $19,000.

The incidence of debt was much higher among those in the same age group who had not yet retired.
Among pre-retirees aged 55 and over, two-thirds held mortgage or consumer debt and their
median debt load was $40,000, double that of retirees.

Among retired people with debt, 25% owed less than $5,000, 32% owed between $5,000 and $24,999,
while 26% owed between $25,000 and $99,999. At the high end of the debt scale, 17% owed $100,000 or more.

http://www.statcan.gc.ca/daily-quoti...10427b-eng.htm

[Ross]

Building permits are UP 11%.

WTF!

( Love that attitude ...... "We are going to party through global meltdown and Armageddon" ? )




Source : StatsCan

[CanadaSue]

No, not a question of 'partying through Armageddon' but a serious housing shortage in certain regions & of specific types. Condos are king & the 'price bubble' is due to a shortage. In some of the big cities buying a house is utterly impossible - little available land & what older stock is for sale is going for insane prices. Even houses with sketchy plumbing, knob & tube wiring & other major repair work needed are going for staggering prices. Buy a house needing nothing more than cosmetics? Even higher prices.

Immigratio remains fairly strong here & many well off or at least financially decently situated imigrants aren't into the suburban dream. They're used to apartment living & that adds to the market for condos. Boomers are starting to retire & many are dumping the house & moving to a condo - someone else does the maintenance. For young buyers looking to get into the market - condos are a logical first step - certainly in today's market.

Another significant factor - rental stock is not being added to nearly quickly enough & existing stock is aging rapidly. Big landlords are hesitant to start new builds. Oh, they're happy enough when they're building higher end rentals but medium to low market? No money in it for them in the short term? Many well off boomers are buying condos & renting those out. An article, (I'll post the URL), states most aren't looking to do more than break even or a bit better - they're after capital appreciation:


***A new kind of landlord***

http://www.househunting.ca/ottawa/ki...817/story.html


Combine changing demographics & an economy that's questionable & you end up with interesting moves in the housing market.


***Condo strength propels jump in building permits***

http://www.theglobeandmail.com/repor...rticle2329228/