Outline 1. Macro backdrop & the Bank of Canada 2. Canadian Housing: a)Strains b)Mitigating Factors c)Why It’s (Somewhat) Different From the United States d)Pockets Of Concern
The Macro Backdrop – BoC On Hold Throughout
Spare Capacity Will Prevent The BoC From Hiking Through Even The BoC’s Output Gap Doesn’t Go Into Excess Demand By 2014
Canada’s Current CPI Softness Could Be Returning Us To The Past
Among The World’s Best Corporate Balance Sheets Source: Statistics Canada, Quarterly Survey of Financial Statements, Scotia Economics
2.Canadian Housing a. The Strains
Canada Is At A Cycle Top In Housing Source: Statistics Canada, Census of Population, U.S. Census Bureau, Housing Vacancy Survey, U.K. Office for National Statistics, Census of Population, Australian Bureau of Statistics, Census of Population and Housing. Source: K:\DATA\CANADA\ Housing\Home Ownership.xls
Source: OECD, Eurostat, UK National Statistics, Scotiabank Economics. Real consumer spending indexed to 2007Q1 = 100 Canada Is At An Exhausted Point In The Consumer Cycle Canada U.K. US Euro zone Japan
Source: MLS, Statistics Canada, Scotiabank Economics. C$ bns, nsa, 4-quarter moving average Canadian Renovation Spending % of personal disposable income, nsa, 4-quarter moving average Canadian Renovation Spending At A Record High
Sharply Cooling Canadian Housing Resale Markets
Canadian House Prices In Early Decline Phase
Canada – Teranet National Bank House Price Index US – Case-Shiller Home Price Index Source: Teranet National Bank House Price Index, S&P/Case-Shiller Home Price Index, Scotiabank Economics. index:Jan 2000=100 Home Price Indices – Repeat Sales Metric
Canadians Have Higher Debt… But Stronger Balance Sheets * Includes households, non-profits and unincorporated business. Source: U.S. Federal Reserve, Statistics Canada, Scotiabank Economics. Canada* US household credit liabilities as % of disposable income Canadians’ Debt-To-Income Now Higher… Canada* US household debt as % of assets … But Less Debt Used To Buy Assets
Canada’s Debt Service Burden Is At An All-Time High Source: Bank of Canada, Statistics Canada, Scotia Economics. Distorted by accounting change
No Leverage Apart From Household Debt? Think Again Condos have driven all of the rise in housing starts for years… …estimated 45-60% of Toronto of new condo sales over recent years have gone to investors not for primary occupancy…. …5-15% down payments at sales office openings imply +/- 10 times gearing… …then flip when the project goes live Leveraged equity has been behind this
Will Canadian Housing Starts Follow Sales Like They Did In The US?
Scenarios For Housing Starts
Weakest Household Debt Growth Since The 1990s… Common/raffi/derek/ Household Credit Cannibalization - Back to 90's.xls
…Especially For Consumer Loans Common/raffi/derek/ Household Credit Cannibalization - Back to 90's.xls
2.Canadian Housing b. Mitigating Factors
After Ottawa Eased The Most Since 1954 NHA and 1967 Bank Act… 1999: Introduction of 5% down payment insured mortgage 2003: Price ceiling on insured mortgages lifted 2005: Introduction of insured mortgage with 30-year amortization period 2006: Introduction of insured mortgage with 35-year & 40-year amortization periods 2006: Introduction of 0% down payment insured mortgage
…CDN Macroprudential Rules Clamped Down After sharply easing mortgage lending standards in , the federal government has since reversed its position October 2008: Max 35 year amortization for insured mortgages; minimum 5% down for insured mortgages; consistent minimum credit score; new loan doc standards for property value and incomes February 2010: Qualify at 5 yr posted rate instead of 3 yr; lower refi ceiling to 90% from 95%; min 20% down required to get mortgage insurance on non-owner occupied properties January 2011: Max 30 year amortization for insured mortgages; refi ceiling for primary occupancy homes dropped to 85% from 90%; withdraw gov’t insurance on HELOCs November 2011: Accounting changes to hold more on balance sheet June 2012: Max 25 year amortization for insured mortgages; insurance dropped for mortgages on homes valued over $1 million (ie: now minimum 25% down); refinancing ceiling dropped to 80% from 85%; mortgage payments and total debt payments capped at 39% and 44% of income respectively Federal Budget: OSFI oversight of CMHC Spring 2012: Insurance lifted from covered bonds, portfolio caps at the CMHC, new OSFI lending guidelines to banks January 2014: Basel III A key difficulty lies in evaluating the opaque forms of non-rules-based tightening being applied through moral suasion by regulators to lenders and GSEs.
Assessing Mortgage Rule Tightening
Housing Starts Single-detached Good Reasons For Rising High-Rise Housing Demand? % share of total Source: CMHC, Scotia Economics. Apartment Better affordability Favourable demographics Lifestyle choices More selection Urban renewal / intensification Tight rental vacancy rates Investor purchases
Canadians Have More Home Equity & More Real Estate in their Portfolio Includes households, non-profits and unincorporated business. Source: U.S. Federal Reserve, Statistics Canada, Scotiabank Economics. Canadians Have More Home Equity… Canada US Real estate equity as % of real estate assets Canada US … and More Real Estate Assets Real estate as % of total household assets
2.Canadian Housing - c. Why It’s (Somewhat) Different From The U.S.
Explicit GSE guarantees – unlike the US GSEs Strongly capitalized banks & captive dealers, far less shadow banking Totally different funding model: deposit funding & large held-on-book component, versus reliance upon revolving door financing Financial institutions less reliant upon short-term lines No strategic defaults, outside of Alberta & Saskatchewan (and limited there) Tougher bankruptcy rules Less outsourcing of sales force in Canada Generally more conservative products, but not entirely No option ARMs in Canada, but entire book resets within 5 years No mortgage interest deductibility (with exceptions) Stricter underwriting criteria including independent appraisals & hair-cuts Canada has already taken steps to tighten mortgage rules… …and is pursuing further financial reforms (Basel III, OSFI oversight etc) What Makes Canada’s Mortgage Market Different?
Canadians Usually Don’t Default When House Prices Correct Canada has witnessed some big price corrections since the late 1980s that corresponded with big shifts in the macro environment, notably in Toronto and Vancouver, and yet each time mortgage arrears barely budged. Implication? Revenues are at greater risk than charge-offs. trough to peak in provincial mortgages in arrears, bps
2. Canadian Housing – d. Pockets Of Greater Concern
Canadian Households More Heavily Leveraged Than Most
Toronto Condo Investors Under Water
Toronto’s Luxury Condos Adding To The Overhang Trump International Hotel & Tower Shangri-La Toronto Four Seasons Private Residences (East & West Towers) Residences at the Ritz-Carlton Opening Date: January 2012 August 2012 Summer 2012 April storeys 118 residential units 261 hotel rooms 66 storeys 202 hotel rooms 287 residential units 55 storeys 253 hotel rooms 103 residences 25 storeys 101 residences 53 storeys 267 hotel suites 159 condo units Source: Andrew Barr/National Post, THERESIDENCESTORONTO.COM, TRUMPTORONTO.CA, SHANGRI-LATORONTO.COM, YORKVILLERESIDENCES.COM.
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