Posted on 12 November, 2010 | 54 Comments
Unbeknownst to most Canadians is the fact that most households are nearing the financial tipping point that Americans reached only a few years ago — a tipping point which plunged the US into the deepest recession since the Great Depression.
Canadian households are now more overextended than households in the US as low borrowing costs have sparked a dramatic increase in Canadian consumer credit. The debt to income ratio among Canadian households now stands at 150 per cent — up from 145 only six months ago. This is the highest level on record since quarterly record keeping began in 1990. It means that for every $100 of personal disposable income, Canadians now carry $150 in debt.
In fact, Canadians are also now even more extended than were most Britons and Spaniards prior to the bursting of the housing market in their countries.
At the same time, a number of Canadian banks including CIBC and BMO have issued reports stating the housing market as being overvalued by anywhere from 10-14%.
With the Harmonized Sales Tax firmly in place now, we are seeing housing markets in Ontario and BC completely dry up. Sales have fallen off a cliff. What was a sellers market only a few weeks ago is now a buyer’s market as owners are being forced to discount their home prices by 5-10% just to drive traffic so they can showcase their home.
If true, this has huge implications. Decreasing home prices are a slippery slope. As we saw in the US, a decrease in housing prices creates a vicious spiral downwards – largely due to the domino effects of banks having to take over defaults and foreclosures and reselling them at distressed prices. Basically, foreclosures lead to lower house prices which leads to more foreclosures which leads to lower house prices and so on. Most people forget that in the last Canadian housing bubble n 1989, it took five years for house prices to reverse their downward trend and to finally stabilize.
Interesting enough, few Canadian banks are actually taking their own advice. One would have thought that the Canadian banks would have learned something over the last two years from their foreign counterparts. Logic and history would suggest that the big banks adjust their risk model to recognize the higher probability of credit default but this is not the case.. With the big six banks so focused on maintaining and growing market share, the threat of rivalry blinds them to the large economic risks out there.
For now, we Canadians have been very fortunate in that we have diverted most of the economic malaise facing most other countries in the world. But the recent fall in Canadian home prices and the increase in unsold homes on the market are warning signs that should not be taken lightly. In all likelihood, it is no longer a matter of ‘if’ but when.
Jeff Kaminker
President, Frontwater Capital
www.frontwater.ca
www.fwcapital.ca
January 7th, 2011 at 3:08 pm
Is there any updates regarding this topic…
Best regards,
Fouad
February 13th, 2011 at 11:50 am
Hi Fouad,
There’s no follow up on our end but you probably have noticed that Canada’s housing market has become a hot topic. This past week, most of Canada’s national newspapers picked up an article from Capital Economics stating that they believe that the Canadian market could potentially drop 25% as mortgage rates begin to rise.
Jeff Kaminker
President, Frontwater
August 23rd, 2014 at 6:11 am
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