FINANCIAL ICEBERG

Always consider hidden risks

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MARKET INSIGHT

Canadian Housing Sector - Over Confident and Over Built

( From BOC, MacroBusiness, CREA,​ Canada s Housing Bubble, The Atlantic, Teranet , IMF, Statistics Canada )

The Concerns



Canadian economy is slowing quickly

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The slowdown in the Canadian economy in the second half of 2012 was more pronounced than the Bank of Canada had anticipated at the time of the October Report. In particular, exports and business fixed investment have been weaker, reflecting both foreign and domestic developments. While global tail risks have diminished, foreign demand has been more subdued than expected. The Bank of Canada has also become increasingly worried about the level of household debt and the unbalanced nature of Canada’s economy.



And the Bank of Canada continue to be upbeat about the economy as shown by the graph below. ​​







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Conclusion

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It looks to me like the Canadian housing market is facing some sort of correction. It’s just a question of whether it will unwind gradually or in a disorderly manner.

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​​​Canada is quietly trying to deflate its bubble without any eye-catching headlines. And that means keeping interest rates low while making mortgages harder to get.



But the level of house prices, the extremely high level of household indebtedness, the slowdown in the economic activity and exports​​ are all serious warning signs that a potential huge correction can take place.





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Though we Canadians like to convince ourselves that it's different here and house prices will rise incessantly despite overwhelming evidence to the contrary, history remind us that this belief is as irrational as it is dangerous.



Canada is not immune of an economic and housing slowdown...

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The Economic Situation



​​ Canadian growth slowed to about ¾ percent in the second half of 2012, with fiscal consolidation, tighter consumer credit, a cooling housing market, temporary disruptions in the energy sector, and an uncertain external environment weighing on economic activity.



​​Economic growth is projected to be 1½ percent on average in 2013; business investment and net exports will benefit from the U.S. recovery, but high household debt and continued moderation of the housing sector will restrain domestic demand . Risks around the baseline scenario remain tilted to the downside, in particular from adverse fiscal outcomes in the United States, further turbulence

in Europe, a decline in global commodity prices, and a less gradual unwinding of domestic imbalances .



​​The main challenge for Canada’s policymakers is to support growth in the short term while reducing the vulnerabilities that may arise from external shocks and domestic imbalances. Although fiscal consolidation is needed to rebuild fiscal space against future shocks, there is room to allow automatic stabilizers to operate fully if growth were to weaken further. The current monetary policy stance is appropriately accommodative, and the beginning of the monetary tightening cycle should be delayed until growth strengthens again.



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Residential investment has declined further from historically high levels, owing to lower rates of new construction. As we swa earlier, housing starts dropped markedly in the first quarter to an average of about 177,000 units, after remaining above demographic demand (estimated at roughly 185,000 units) over the past two years.



​​Despite the recent moderation in the rate of new housing construction, there are still signs of overbuilding, particularly of multiple-unit dwellings in some urban areas ( see graph below ). The resale housing market has shown some signs of stabilization in recent months, following the easing in both activity and prices from the high levels reached between the latter part of 2011 and early 2012. Still, valuations in some segments of the housing market remain stretched.

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Residential investment is anticipated to decline further as overbuilding begins to be addressed, contributing to a more sustainable path for the housing sector. In this regard, the share of residential investment in the overall economy is projected to decline toward its historical average.

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Construction intentions in the residential sector fell 7.2% to $3.6 billion in February, the ninth decrease in 12 months. Residential construction intentions have been pursuing a downward trend that began in mid-2012. An increase in construction intentions for single-family dwellings was not enough to offset widespread declines in construction intentions for multi-family dwellings. The value of permits for residential buildings declined in seven provinces, led by British Columbia and New Brunswick.

Construction intentions for multi-family dwellings decreased 19.1% to $1.3 billion, the seventh decrease in eight months. The decrease came from every province except Prince Edward Island. Most of the decline was accounted for by New Brunswick, British Columbia and Ontario.



In February, municipalities issued $2.3 billion worth of building permits for single-family dwellings, up 1.1% from January and the second consecutive monthly increase. Higher construction intentions in Alberta, Manitoba and Ontario more than offset decreases in five provinces led by Saskatchewan, British Columbia, and Newfoundland and Labrador.



Municipalities approved the construction of 14,071 new dwellings in February, down 12.0% from January. February's decrease was largely the result of a 21.0% decline in multi-family dwellings to 7,537 units. The number of permits issued for single-family dwellings rose 1.2% to 6,534 units.



March 2013 Housing Starts in Canada

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Housing starts in Canada were trending at 189,742 units in March, according to Canada Mortgage and Housing Corporation (CMHC). The trend is a six-month moving average of the monthly seasonally adjusted annual rates (SAAR)1 of housing starts.



“As expected, the trend in total housing starts continued to moderate in March. Builders are adjusting to lower housing demand and as a result, completed and unoccupied units per capita remain relatively close to their historical average,” said Mathieu Laberge, Deputy Chief Economist at CMHC.



The standalone monthly SAAR was 184,028 units in March, up slightly from 183,207 in February. The SAAR of urban starts decreased by 2.7 per cent in March to 157,217 units, led by a 6.6 per cent decline in single urban starts to 60,558 units. Multiple urban starts remained relatively unchanged at 96,659 units in March.



March’s seasonally adjusted annual rates of urban starts decreased in Ontario (-15.7 per cent) and Quebec (-13.5 per cent). Urban starts increased in Atlantic Canada (27.1 per cent), the Prairies (13.8 per cent), and British Columbia (13.1 per cent).







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Canadian and US share of Residential Investment in GDP

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​Residential investment is projected to continue to contract, with its share of the overall economy declining gradually over the

projection horizon according to Bank of Canada... Each time the proportion of resudential investment reached 7% of GDP,we had a correction in the residential home construction...

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Very interesting to note is that in the US, in 2006, residential investment reached a little over 6% and crashed after that because of the financial crisis as shown by the graph below...At 2.5% now compare to Canada at almost 7%...

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​​Residential investment is anticipated to decline further as overbuilding begins to be addressed, contributing to a more sustainable path for the housing sector. In this regard, the share of residential investment in the Canadian overall economy is projected to decline toward its historical average, at best...

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Some History - Housing Price Index and Household Debt - US and Canada



​​For the past few years having watched with interest the Canadian housing market’s continued rise in value. Whereas most other housing markets, have taken a breather, Canada’s has powered-on, rising in value by 26% nationally since its April 2009 low, according to the house price index (see next chart below).



​House price growth moderated in 2012, although with some regional variation. National house prices fell 1.2 percent over the second half of 2012, driven mainly by the sharp retrenchment in British Columbia. In turn, this was mainly the consequence of a sharp correction of prices in the Vancouver area, where condos prices were down to their 2010 levels as of December 2012. On a yearly basis, national house prices index is still up by about 3.5 percent in 2012, slightly down from the 6 percent growth in 2011, with Toronto, Calgary and in particular Regina posting the largest increases.

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Canadian household debt, too, is at all-time highs, having recently surpassed the United States ( see graph below ).

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Today, the balance sheets of Canadian households are stretched. After 11 consecutive years with household outlays exceeding disposable income, household debt burdens have increased substantially. Household debt as a percentage of disposable income has risen by almost 60 percentage points to 165 per cent today, and Canadians are now more indebted than the Americans or the British. ( See graph below )

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Impact on Canadian Economy



Construction Industry​​ - Building permits, February 2013



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Level of Indebtedness​​



​​Canadian household debt is far higher than previously thought relative to income, Statistics Canada’s historical revisions showed on Monday .The household debt-to-income ratio jumped to 165 percent in the last quarter of 2012 from 161.8 per cent in the first quarter, according to revisions made to bring the agency’s methodology in line with updated international standards.



​​The soaring debt levels, fueled in part by a hot housing market, have led Bank of Canada Governor Mark Carney and Finance Minister Jim Flaherty to warn Canadians repeatedly against getting too deep into debt at a time of ultra-low rates.





Read Also : Canadian Household - Drowning in Debt

Departing Bank of Canada Governor Mark Carney deserves the plaudits he has received for steering an effective monetary policy that has kept the Canadian economy growing. But the bank’s economic forecasting record on his watch has been consistently wide of the mark, forcing steep revisions to account for worse-than-expected conditions and calling into question its persistent bias toward raising rates down the road.

Construction Industry



​​​Even if the construction industry represent 7% of total GDP, it is very important in terms of economic development and investments. If that sector is starting to see a slowdown in coming years, and coupled with the export sector already weak, it can be a tremendous drag on Canadian GDP.



And because Canadian construction workers ( residential and non-residential workers ) represents 8.7% ( 1.3 millions workers ) of total workers​​ compare to 4.4% in the US, just figure out the magnitude of job losses by bringing the share of residential investment in the Canadian overall economy is projected to decline toward its historical average.





Spill Over Effect on Consumers

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What history told us especially from the US and UK, is that the household net worth, mainly houses, can have an huge impact on consumers attitude toward spending. Lower net worth can hurt the economy. When people feel poorer, they spend less. That slows growth. Businesses typically then cut back on hiring and expansion.

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Although its exact contribution is hard to assess, the potential destruction of wealth cause by the price correction on houses is likely to contribute to a rise in the household saving rate and weakness in consumption in Canada

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And because in Canada, total consumers consumption are 69.8% of total GDP​​, anything that can change the behavior of consumers is woth noticing...

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