FINANCIAL ICEBERG

Always consider hidden risks

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MARKET INSIGHT

Canadian Mega Giga Housing Bubble Part 2 - Impact on Canadian Economy

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

The situation ( if you didn t read Canadian Mega Housing Bubble First Part click HERE

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



But ​​there are tentative signs that Canada’s housing market may finally have peaked, with the Teranet national index recording four consecutive monthly falls (down -1.3% since August 2012), which is the longest consecutive number of monthly falls since the 2008 recession.

For the past few years having watched with interest the Canadian housing market’s continued rise in value. Whereas most other housing markets, including Australia’s, have taken a breather, Canada’s has powered-on, rising in value by 26% nationally since its April 2009 low, according to the Teranet house price index (see next chart).But ​​there are tentative signs that Canada’s housing market may finally have peaked, with the Teranet national index recording four consecutive monthly falls (down -1.3% since August 2012), which is the longest consecutive number of monthly falls since the 2008 recession.

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Canadian household debt

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

Today, the balance sheets of 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 )

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.

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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 163.4 percent in the second quarter 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.





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.





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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Sales of Existing Sales already show weaknesses



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Housing activity has also moderated recently. Sales of existing houses have softened, falling below their 10-year average in the third quarter. More recently, housing starts have also fallen from very high levels, but even with this decline, housing construction remains above demographic demand…



​​According to statistics released today by The Canadian Real Estate Association (CREA), national home sales activity was little changed on a month-over-month basis in December 2012, holding it in line with levels reported in August when demand first geared down in the wake of tighter mortgage lending rules.



Actual (not seasonally adjusted) activity came in 17.4 per cent below December 2011 levels. Four of every five local markets posted a year-over-year declines in sales activity in December. ( See graph below )





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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Residential Sector

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​Construction intentions in the residential sector fell 13.1% to $3.3 billion, following a 7.0% decrease the previous month. Ontario, Alberta and Manitoba accounted for much of the decline observed at the national level. Newfoundland and Labrador was the lone province that registered an increase.



In the non-residential sector, the value of permits declined 8.5% to $2.5 billion in December, the third decrease in four months. Manitoba posted the largest decline, followed by Alberta. Quebec had the largest increase with Ontario a distant second.



Residential sector: Lower construction intentions for single-family and multi-family dwellings



Municipalities issued $1.1 billion worth of building permits for multi-family dwellings in December, down 24.6% from November. This was the sixth consecutive monthly decrease and the lowest level since February 2011. There were declines in all the provinces, with Ontario posting the largest decrease, followed by Alberta, Quebec and Manitoba.



Construction intentions for single-family units fell 5.3% to $2.1 billion in December, the third straight monthly decrease. The decline was mainly attributable to lower construction intentions in eight provinces, with Ontario posting the largest drop followed by Saskatchewan and British Columbia. By contrast, Quebec and Newfoundland and Labrador posted gains.



At the national level, municipalities approved the construction of 13,897 new dwellings in December, down 15.2% from November. This decrease was led by a 22.1% decline in multi-family units to 7,630. At the same time, the number of single-family dwellings decreased 4.9% to 6,267 units.



Non-residential sector



In the commercial component, the value of permits declined 10.6% to $1.6 billion in December, following a 26.1% increase in November. The decline was a result of lower construction intentions for various types of commercial buildings, including office buildings, recreational facilities and warehouses. The largest decreases were in Ontario and Alberta. Quebec, New Brunswick and Prince Edward Island posted increases.



The value of permits in the institutional component fell 5.3% to $498 million, a second consecutive monthly decline. The decrease was mainly the result of lower construction intentions for medical buildings in Alberta and British Columbia as well as educational institutions in British Columbia and Manitoba. Advances were registered in four provinces, led by Ontario.



In the industrial component, the value of permits declined 3.3% to $377 million, the second consecutive monthly decrease. The decline was largely attributable to lower construction intentions for manufacturing plants in Manitoba, Quebec and, to a lesser extent, Saskatchewan. Increases in four provinces, led by Ontario, were not enough to offset the declines in the other provinces.



Annual 2012: Residential and non-residential construction intentions higher than 2011



In 2012, municipalities issued building permits worth $80.5 billion, up 8.9% from 2011 and surpassing the peak of $74.4 billion reached in 2007 before the recession.



Similarly, contractors took out residential construction permits worth $48.3 billion in 2012, up 8.6% over 2011.



Construction intentions for non-residential buildings were also up, rising 9.2% from 2011 to $32.2 billion in 2012.



Total value of permits

Residential and non-residential sectors

Impact on Canadian Economy



Construction Industry​​ - Building permits, December 2012

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​The total value of building permits issued by Canadian municipalities declined 11.2% to $5.7 billion in December, following a 14.5% decline in November. This decrease resulted from lower construction intentions in both the residential and non-residential sectors.



December's decline in construction intentions came from every province except Quebec, with Alberta, Manitoba and Ontario posting the largest decreases.