Canadian inflation heats up; Why housing won't carry us through a recession; Positive mortgage in arrears data
OCTOBER 21, 2011
Canadian inflation heats up:
Stats Canada has released the September reading of the consumer price index (CPI), which showed a strong bounce in both the core and all-item index. The all-item index rose to 3.2% on a year-over-year basis while the core has finally breached the target 2% boundary for the first time since 2009:
The increase in the CPI was mainly due to higher prices for gasoline and food, although the core index, which strips out these volatile items, rose much more than anticipated, primarily on the back or rising vehicle, clothing, and produce costs.
This surprisingly strong reading certainly reduces the likelihood of a Bank of Canada rate cut, which has widely been anticipated by the bond markets. However, the markets didn't seem overly concerned by this reading. The 5 year Government of Canada bond yield rose just under 6 basis points, while the 3 month overnight interest swap was little changed, and still signals that most traders still believe that the next move by the Bank of Canada is more likely to be down than up.
Why housing can't be relied on to carry Canada through a recession:
That's the title of a great article featured in today's Canadian Business blog. Of course, my position remains that Canada escaped the worst of the Great Recession by pumping leverage into the system. Housing remained robust, which meant spending and consumption wasn't hit as hard, and today we are lauded for having 'prudent' banks and 'conservative' consumers that managed to escape the recession not because of strengthening balance sheets, but for exactly the opposite reason. And with housing at increasingly stretched multiples of income, per-capita GDP, and with it having massively outpaced rents and inflation, it's hard to see how a similar miracle can be counted on to pull us out of another recession, should one hit.
Some juicy snippets from the article:
Canada’s housing market continues to amaze...The seasonally adjusted annual rate of starts stood at 205,900 units in September, up from 191,900 in August and well above expectations. Meanwhile, prices for new and resale homes continue setting records.
Such strong demand for housing is a powerful elixir for the economy. That’s because houses need concrete foundations, softwood framing, asphalt shingles, windows and a veritable army of workers to assemble and install it all. Recent homebuyers also go hunting for furniture, appliances and plenty of other big-ticket items to fill out their new digs. These forces helped Canada weather the recession of 2008-2009 reasonably well, even as other countries such as Britain and the U.S. plunged into turmoil from which they’ve yet to emerge. And now, many commentators expect Canada’s housing market is set for a repeat performance, helping deliver the country from the current global turmoil.
Call me a killjoy, but I’m anything but enthused about our current level of housing activity. It would be wonderful if it were sustainable. It isn’t.
The reason, as any alert reader will readily surmise, is that our housing market is as reliant on healthy credit markets as a junkie is on a ready supply of heroin. Over the last generation consumers have been on a one-way street toward greater indebtedness, both in absolute terms and relative to their incomes. According to Statistics Canada, the ratio of household debt to disposable income stood at just under 150% at the middle of this year.
Well said. And as mortgage debt to GDP ratios seemed to have peaked and as the year-over-year change in mortgage credit outstanding slows to levels not seen since the start of the boom, it seems awfully unlikely that prices can be supported at these multiples of income without either i) robust income growth (not in the cards) or ii) robust credit demand (fading fast). Nevertheless, it may well be different here. Or not.
Mortgage in arrears data encouraging:
The latest mortgage in arrears data (as of August 2011) is out, and it shows a broad decline across nearly all provinces. You can see the data for all provinces in the link. Unfortunately, I only have time to graph out a few of them....so we'll go with the most populace provinces:
It is encouraging that these stats are falling, although I still maintain that one of the principle side effects of a nasty housing correction, which I believe to be quite likely, would be a rise in delinquencies and foreclosures. While people are quick to protest that Canada is primarily a recourse jurisdiction (with the notable exception of Alberta), while most US states were non-recourse, I would be quick to point out that the recourse in most US states only applied to the principal mortgage and not subsequent refinancing, which was one of the hallmarks of their boom....and ours by the way.
The reality is that no one goes into serious delinquency unless they have nothing to lose and have no way to make the payment. And since here in Canada, our bizarre system is set up so that you can pay your mortgage straight from your home equity line of credit, it means that as long as people have enough equity for a HELOC, they have both the ability and the motivation to pay. But take that away, and things get hairy. Fast.