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Just So We Are Perfectly Clear - Canada Has A Major Problem

Jul. 15, 2017 10:21 AM ETRY, EWC, CNDA-OLD, EWCS, QCAN, FCAN, HEWC, RY:CA242 Comments
Superinvestor Bulletin profile picture
Superinvestor Bulletin


  • The Bank of Canada just raised the key interest rate by 25 basis points because of strong economic fundamentals.
  • Investors should not be misled into thinking that there is anything but trouble on the horizon for Canada's economy.
  • The Canadian consumer is leveraged beyond belief and house prices are ridiculously priced relative to income.

A decade ago I thought that Canada (EWC) was in the catbird seat.

First, it seemed all but certain that we were headed towards a future of steadily rising (if not spiking) oil prices.

Canada, which was sitting on mountains of barrels of oil in the tar sands seemed to be on the verge of a 50 year boom.

Second, while the U.S. banking sector was falling apart the Canadian banks stood tall thanks to their responsible lending practices.

Yes, the future looked bright. There was a long term economic catalyst and there was a rock solid banking system.

My how things have changed.

This week the Bank of Canada raised its key overnight lending rate by 25 basis points from 0.50 to 0.75. The reasoning for the decision was a quickly improving economic outlook and a stated primary desire to always keep inflation under control.

The Canadian dollar has responded to the Bank of Canada hinting at and then instituting this increase.

Source: XE.com

That is an eight percent swing in roughly a month which is a big move for a currency.

Don’t bet on it continuing. This country has a huge problem with respect to real estate and the debt that is directly tied to that. There is no way that the Bank of Canada is going to be moving rates higher in any meaningful way.

The Canadian housing and debt situation is going to be an anchor on this economy for a long time to come. If it isn’t it is only because the problem has disappeared in a shorter time period through a major housing crash.

Let me show you what Canada is facing through a series of charts.

The first chart makes very clear what has happened in the Canadian housing market. The chart plots Canadian

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Comments (242)

Dale Roberts profile picture
That's what some have suggested as a theme moving forward. Here's my article on Canada set to outperform. But of course no one knows the future. From early May Why Canada may be set to out perform US stocks, again.


Denture Capital profile picture
Nice article. Thank you!
Peter Angus profile picture
Hi Dale, I read your article and I enjoyed it. I am Canadian. My approach has always been..buy a stock, whether it be Canadian or American, have a compelling opinion as to why it is undervalued. This toggle between US and Canadian securities gives me pause to ponder. Thank you
Dale Roberts profile picture
Thanks Peter, it is the market of course that offers more earnings yield. We can buy a lot of earnings up north, but who knows?

But you'd think that has to count as some point, with markets being weighing machines and all over longer periods. Canadian banks are always offered with juicy earnings yields, it seems, a perpetual 'discount' due to perceived risks.

Dale Roberts profile picture
TSX hits new high on Wednesday.

Denture Capital profile picture
TSX is obviously stronger than SPX lately.
Dale, as you know the TSX has a LOT of catching up to offset the last 5 abysmal TSX returns
Dale Roberts profile picture
Yup, I think that's the premise from Mr. Rosenberg and others. Let's hope that catch up turns out to be the case. It's happened in the past, of course.

Denture Capital profile picture
XFN is much stronger than IXG, EUFN and CHIX and even stronger than XLF. I think it will still take a while until the problem emerge in the Canadian banking system. What makes me concerned now is rather the weakness of EUFN. EUFN is obviously weaker than any other countries' financial sector ETFs. I haven't seen any convincing articles about why EUFN is weak, but I guess something bad is going on behind the scene in the European banking system.
Jennifer Cameron profile picture
Of all the problems you can have in this world, I'll take Canadian ones, thanks.
Denture Capital profile picture
This problem hasn't shown up on the main street yet. But, I don't think this problem hasn't gone away.
Dale Roberts profile picture
Well Canadian big banks certainly don't have a major problem. Very solid earnings and dividends recently.

User 509088 profile picture
Canadians put their money in usd at par, and started getting out when pm Trudeau announced his infrastructure plans.

That's a 25- 35% profit BEFORE the instrument itself.

There's a lot of money going back. Thanks for the fish, eh?

That money already had houses.

Canada's banks were heavily into imf's industrial takeoff scams, back in the day. They took it in the face. Nobody ever heard about it.

Detached homes priced well still move. Condos, not as much. reno, not as much. The higher the price, the slower the action.

coffeebreak profile picture
"The BoC likely made a huge policy mistake as the economy has spent the past few months in deflation. Deflation which now appears to be accelerating, especially with the rising currency."
ye, ye. they are in guessing mode......the rate hike was just window dressing, nothing more. their goal was to prop up the lenders with higher rates on the sell side. plus the market is quite fragmented and not efficient enough.
Higher rates damage the lenders. The BoC really believes that the Canadian economy is breaking out, when in fact its just returning to 2014 levels of production (as evidenced by railcar traffic, for instance!).
1234gel profile picture

The BOC at their last meeting raised rates, which usually is a magnet for foreign money. The FX market has been going "nuts" as the CAD is in lift-off mode. The BOC must be forecasting inflation, I assume.
The BoC's rate increase drives a domestic slowdown in spending, but hasn't done anything to attract foreign money. The BoC likely made a huge policy mistake as the economy has spent the past few months in deflation. Deflation which now appears to be accelerating, especially with the rising currency.

Higher rates are historically bad for currencies, BTW.
User 47803322 profile picture
How do you figure were are in a deflationary environment?
Month over month CPI has been negative for the past few months, and that was before the CAD$ surged. With falling RE prices, and the rest of the economy not really doing very well, it spells deflation.
1234gel profile picture
Hey Mark0f0....

There is a lot of foreign money flowing into Canada. Anytime the BOC raises rates, in comes the money. China looks upon Canada as a slot machine that spits out absolute bargains.
No, no foreign money flowing into Canada. BoC rates are irrelevant. Canada runs a trade deficit with the rest of the world at the moment, but foreign reserve accumulations of Canadian dollars exceed CAD$ being exported. Hence, capital is actually, on the net, flowing out of Canada.

The 'foreign money' theory is complete and unadulterated nonsense fomented by Realtors desperate to justify a domestic credit bubble.
coffeebreak profile picture
"I thought that Australia and US have some restrictions on foreign buyers but Canada seems to be turning a blind eye as so much capital flows into the country. Obviously some Canadians are making a lot off of this."
ye, ye. Canada is desperado for foreign investments (direct and portfolio). all fresh investments are welcome. the market is still underperforming, so the need for fresh capital injections is quite present.
It would be nice if there was actually foreign money showing up in Canada, but most of the evidence points to little to none of it.
The Cannabis industry will soon grow fast and create new jobs. Canada wants to supply the world. In Canada they call it Cannabis to give it a sort of Professional sounding business. US still calls it MJ.

But the US states will hit them back with their home grow MJ. US MJ industry is growing where the States have legalized.
One MJ company is buying a town in CA and going to turn it into a MJ destination.
I doubt cannabis will turn out to be a big thing in Canada. Everyone who wants to smoke it already does. There's already a big infrastructure that exists to grow it. Okay, some of the existing producers will have to reduce their workforce but those people will just move into the legit production workforce. A net zero. Actually with decriminalization, prices may very well crash, meaning that nobody profits off of growing what essentially amounts to a vegetable.

There's a lot of delusion in Canada's publicly traded cannabis sector. Pro formas are using prices often that are equivalent to the illicit price, which is just complete nonsense.
retired@thebig50 profile picture
I guess that the IMF report that was released today should be ignored and we should follow your advise .

Canada is expected to lead the G7 in growth for the next year !!

Fake news ??
coffeebreak profile picture
"How many Americans go north for a procedure"
ha ha. they go South/East for "procedure".... too cheap and better quality/speed.
Plenty of Americans come to Canada for eye surgery in particular, which is part of the Canadian healthcare system that isn't government subsidized nor heavily regulated.
Dale Roberts profile picture
Tens of thousands have Canadian health cards, illegally. The only ones to get free health care as they don't pay in, ha.

They can't get away from HST/GST if they live here. Other than that I suspect the typical health care cheat wouldn't have enough income to pay any more in taxes.
1234gel profile picture
There is no distortion in the current housing costs, for the reason the real estate market is competitive, and is not manipulated for the benefit of select groups. I have lived in W. Vancouver for quite some time, and the costs are relative to the desirability of the location. Hey.... one can always get cheaper housing in Regina, but who in hell wants to spend time there instead of Vancouver ?
coffeebreak profile picture
"They estimate that 11,000 home are unoccupied."
ha ha. put the BC homeless folks there.........problem solved.
Taxpayer funded > of course putting the homeless in Million $$$ homes.
Maybe the crack shacks. That should work , they wreck everything anyways.
1234gel profile picture
The recent boost in rates by the BOC, and the promise of more rate increases in the near future is driving the CAD to new highs. The currency and the elevated rates will attract foreign money which will assist in the expansion of the economy. The good news for Canada is the US government will likely reduce corporate taxes in the near future which will expand the economy in the US.... also a benefit to the Canadian economy.
US corporate taxes aren't going anywhere but up in the future. The CAD$ is doing well not because of rate hikes (which will soon be reversed), but rather due to falling housing prices and the deflation that such accompanies.
Your article did a good job of detailing the Canadian housing problem(s). To complete the picture, I would appreciate your comments on how the equity in Canadian home ownership compares to the equity in the US home ownership. Is the Canadian equity the same as it was in the US in 2007? Further, what value or premium do you place on Vancouver and Toronto property values as they move toward becoming international cities where real estate prices are much higher? Finally, Canadian interest rates are being held down to stimulate the economy, which puts upward pressure on housing prices. Is this an acceptable trade-off?

Rents would go much higher if Vancouver/Toronto were truly "international cities". But we have an extremely abnormal price to rent ratio, which is a classic sign of a financial bubble.
BTW, Canadian interest rates are low because the economy sucks. Until 2013, most of the money went into RE alone, because of the CMHC. The CMHC stopped expanding in 2013, and the housing market plateaued shortly thereafter.
Dale Roberts profile picture
Canadians have high ownership rates. We can't write off our mortgages (bad tax policy). Everyone I know in the boomer category owns their home or owns most. Many have moved on to cottage property as well.

User 47803322 profile picture
With all the predictions the only certainty is that nobody really knows. It's impossible to believe any numbers that come out from goverment in terms of what is driving the market and what is just as certain is that you won't get the truth ouf of the real estate sector. Inflation numbers and employment numbers are hocus pocus. Throw in the diehards who live and die with the Canadian lenders and those who predict the sky is falling and all you really have is noise and the entire bubble will explode taking everyone down with it. Or not.
peace 2 u profile picture
I am surprised at the number of people who have commented. I would not have expected an article on Canadian real estate to draw so much attention.

Just a thought or two.
First, let me tell you that it is good to discuss with somebody who really want to have a reasonable discussion on this topic. To fully understand the risk, a key graph that I would like to see is the loan to value ratio with a comparison to the US. If the loan to value ratio is moving up significantly, there is good reason to panic. Otherwise, it would be useful to understand the impact of foreign borrowing on the charts (Is foreign borrowing included in total borrowing while the number of household does not include the foreigners).
a complement: It seems that Stats Can is trying to capture the info

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