Category Archives: Canadian Economy

Tracking Canadian House Prices: July 2016

This article uses data on Canadian house prices taken from: Teranet – National Bank National Composite House Price Index ™ unless otherwise noted. The index is published monthly on or slightly after the 12th of each month at The 6-city index includes Vancouver, Calgary, Toronto, Ottawa-Gatineau, Montréal, and Halifax, while the 11-city index adds Victoria, Edmonton, Winnipeg, Hamilton, and Québec City.

As the August 12, 2016 Teranet newsletter (Communiqués tab) summarizes (note that this link is for the current issue only) (emphasis added):

In July, the Teranet–National Bank National Composite House Price Index™ was up 2.0% from the previous month, the second largest July increase since the Index series began in 1999. The advance was not very broad-based; prices were up in only seven of the 11 metropolitan markets surveyed. Gains exceeded that of the countrywide index in the four markets that have been driving it in recent months: Victoria (3.8%), Toronto (3.1%), Hamilton (2.4%) and Vancouver (2.3%). Gains were also noteworthy in Ottawa-Gatineau (1.7%), Winnipeg (1.6%) and Montreal (0.6%). Prices were flat in Edmonton and down from the month before in Calgary (-0.1%), Halifax (-0.4%) and Quebec City (-1.6%). The Quebec City drop cancelled the 1.7% advance of the previous month. For Vancouver it was the 18th consecutive month without a decline, with a new record set in each month. For Toronto it was the 14th rise in 15 months, with new records in each of the last six months. Prices have set records in each of the last five months in Hamilton, in each of the last three months in Victoria and in the last two months in Winnipeg, after seven consecutive monthly rises in that market. In Montreal, five consecutive monthly rises have taken prices above their previous peak of July 2014.

With the good transit link between Toronto and Hamilton and the high house prices in Toronto we are not surprised to see explosive growth in the Hamilton market.

Canada: Whither Goest Thou?

A section in John Mauldin’s weekly eletter, Thoughts From the Front Lines, caught our attention. In particular he showed this chart:

The point here is that manufacturing costs (mostly labour) in Canada are 15% higher than in the US. This means that Canada needs the Loonie at 0.87 to be cost equal. To persuade manufacturing to move north however we need a marginal advantage which might be on the order of 5-10%.
This is what unions want of course because the competitive advantage is not achieved by labour cost adjustment and market reform but by currency market adjustment. The real issue to become competitive is to reduce the labour costs. This can be achieved by introducing technology such as robotics or by reducing wage and benefit costs. Unions will fight either approach.

Failure to make the adjustments means a continued loss of manufacturing jobs with a corresponding decrease in the collective standard of living. This will continue until living standards have declined to the point where the labour market will adjust internally to a point of competitive advantage again. Of course if this decline is happening broadly in the developed economies, the adjustment may take a long time and become severe. Can you say third world country?

Update on the Canadian Housing Bubble

When we were doing our monthly update of Tracking Canadian House Prices, we found (Teranet – National Bank House Price Index  –  Communiqués, research tab, Economic News, click for more information) a link to a monthly 2-page newsletter that Teranet publishes for the National Bank Financial Markets. It had a graph that showed the marked divergence between the Teranet house price index for Canada and the Case-Schiller house price index for the US. Through research we found a comparable graph shown in Figure 1 (multiple source attributions shown on the chart).

Figure 1. Canadian and US house price indices.

We took this graph from an April 29 newsletter from Otterwood Capital Management titled: Canadian housing crash? Not yet. Otterwood’s argument is that the strong Canadian housing market is a product of a strong economy (more or less) that is a product of a recovering American economy. One might infer the reverse from this: a US in recession would drive Canada into a recession which would pop the Canadian housing bubble.

O Canada … Uh Oh!

Our friend JR alerted us to this video commentary on the Canadian economy. The video was published May 19, 2013 and we assume that it was produced at a point close to that. At almost 48 minutes it is on the long side and somewhat tedious. However, it is comprehensive in its view of the economy and broad social and economic analysis.

It should be noted that not all of the data is current. Some is taken from studies in prior years and from data sets that lag in reporting. Some economic principles may not be without controversy. Still, the overall picture is one of social and economic decline in an inverse relationship to the growth of the welfare state. Since this growth is continuing the economic picture painted will only get worse.

The commentator spends a long part of the end of the video describing the plight of natives. The problem with his position is that it is entirely one-sided – blame the government. Any obligation on the part of natives to adjust their position and take responsibility for their actions is ignored. If you’re running short of time or have become bored, you might end it at this point.

Without further comment, here’s the video:

Canada: I heard the sound of a thunder, it roared out a warnin’ …

The OECD, in its current General assessment of the macroeconomic situation of the global economy, gives 2 Tables, A1a and A1b, titled Indicators of potential financial vulnerabilities. These tables list 12 categories of macroeconomic activity that could warn of financial vulnerability. They are:

  • Potential GDP growth rate – actual GDP growth rate differential, 2012
  • Actual unemployment rate – NAIRU differential, 2013 Q2
  • Current account deficit , 2012 [1]
  • Relative unit labour cost, 2000Q1-13Q2 [2]
  • Household gross debt, 2012 [1]
  • Non-financial corporation gross debt, 2012 [1]
  • Real house prices, 2000Q1-13Q2 [2]
  • Core Tier-1 capital required to reach 5% of assets in selected banks [1]
  • Nonperforming loans to total loans, latest
  • Financial corporation gross debt, 2012
  • Headline government budget deficit, 2012
  • Gross government debt, 2012
  • Real 10-year sovereign bond yield-potential GDP growth rate differential, 2013Q3

A Love Letter to All Canadians from Your Government: “This Is How We Are Going to Screw You”

We compliment the Canadian Government for its forthrightness and honesty about how it is going to screw its citizens. Unlike the officials and authorities in the EU, the ECB and the IMF who have fumbled the economic rape of Cypriots through a tangle of subterfuge and lies, Canadian officials are much more upfront and direct. Hopefully this essay will help you understand how ruthless and nasty your government is.

We begin with a section on current events – notably Cyprus – that motivated this essay. In Section 2, we highlight certain aspects of the 2013 Canadian budget that may affect bank depositors. In Section 3 we examine the Financial Stability Board’s policy proposal on bank resolution and “bail-in”. Section 4 looks at the Canada Deposit Insurance Corporation in terms of what it insures and what its coverage capability is. We look at the Bank of Nova Scotia in Section 5 to get an understanding of the capital structure of a bank and where the risks reside. This is generalized in Section 6 to a model that allows us to explain the notions of illiquidity and insolvency. Finally, in Section 7, we conclude with  some summary remarks and recommendations on how Canadian citizens might attempt to protect themselves from the depredations of their sovereign. For all figures, click to open in a new window to allow enlargement.

under construction

Flash Point: Canada, You Suck. Even More!

We penned the post Flash Point: Canada, You Suck. with a title that we hoped would invite some serious attention. Well here we go again. A post by Mike Shedlock today, 2012 Export Growth by Country; China and US at Top of List; World Trade Slowdown; Rebalancing at Glacial Pace, displayed the following chart from the New York Times (click on the chart to open in a new window):

The chart surprised us as it shows a net 2.8% decrease in Canada’s balance of trade in 2012. What this means is that the country as a whole lost wealth implying a decreasing standard of living. Is this a one-off event? Statistics Canada tells us in Table 1, Imports, exports and trade balance of goods on a balance-of-payments basis, by country or country grouping, that since 2008, Canada’s balance of trade has deteriorated 3 of the last 4 months with the one exception printing at an anemic 2% of earlier positive trade balances.

Table 1. Imports, exports and trade balance of goods on a balance-of-payments basis, by country or country grouping (millions of Canadian dollars).

2007 2008 2009 2010 2011 2012
Balance 45,594.5 43,669.6 -6,554.5 -10,776.3 911.9 -11,954.3

Many countries with a negative trade balance find that the energy component of imports is the major cause. Canad lacks that excuse. Simply put, Canadians continue to buy toys from the rest of the world living well beyond their means.

Flash Point: Canada, You Suck.

Part of a country’s economic strength is in its foreign reserves. It was with great surprise to find out where Canada ranks in terms of 171 countries. Care to guess? According to Global Finance and using IMF data, Canada ranks 30th behind Thailand (16), Algeria (17), Mexico (18), Libya (the country we just tried to bomb into the stone age) (24), and Turkey (26) among others. In US dollar terms, Canada has $69.8 billion in reserves. For comparison, the Philippines (28) have $78.1 billion. China, ranked number 1, has $2.5 trillion.

As the article notes:

Ample IRs allow a government to manipulate exchange rates—usually to stabilize rates to provide a more favorable economic environment or to purchase its domestic currency to protect the country from a capital crisis provoked by an attack on its currency by speculators.

During economically challenging times, countries whose private capital inflows do not cover their financing needs will often bridge the gap by drastically reducing their trade deficits (through reducing imports [austerity]) or by drawing down IRs. However, other government liquid assets can be applied to liabilities in times of crisis, including sovereign wealth funds (SWFs). If SWFs were included, Norway and the Gulf States would rank higher on the list (the UAE would be second after China) [SWFs are funded primarily by income from oil exports. Canadians on the other hand, spend their wealth even before they make it and have no SWF.]

At some point, the sharks in the global financial markets may see a point when Canada is vulnerable, particularly with insufficient foreign reserves to mount a good defense of its currency. If such a time arrives, expect no mercy – just pain for the folly of spending everything today and saving no reserve for tomorrow.

Data on Canada’s foreign reserves can be found at The Bank of  Canada website and the Department of Finance’s website. It is interesting to note in footnote 1 of the Finance site that the gold portion of Canada’s reserves is assigned to the Royal Canadian Mint at 107,700 oz. or 3.35 tonnes. As Wikipedia notes, Canada ranked 81 in 2010 among the countries holding reserve gold.

Flash Point: The Future of Housing in Canada

We came across this interesting graphic today from Business Insider titled CITI’S MATT KING PRESENTS: ‘The Most Depressing Slide I’ve Ever Created’. It shows a country’s dependency ratio on an inverted scale versus the county’s house price index.

Figure 1. The dependency ratio (dark line, inverted right scale) versus the house price index (light line, left scale) for six countries.

The six charts for specific global markets that have gone through a recent housing bubble suggest that the dependency ratio forms an envelope that the house price index moves inside of.

Flash Point: Blowing Bubbles

We have tracked Canadian Home prices for some time: Tracking Canadian House Prices. In our latest update we suggested that prices had peaked as seen by the recent August decline of 0.35% in the eleven markets surveyed. What we haven’t reported on are the double digit declines of sales in the hottest markets. When sales decline, houses take longer to sell and buyers who can’t wait are forced to reduce their price. The risk is that everyone will head to the exits at once in a highly speculative market. And certain cities that the National Bank home price survey reviews have to be classified as speculative.

Yesterday when we posted Flash Point: Cracks in the Canadian Economy, we referenced a CBC article that stated the current household debt to disposable income ratio was at a record high. We did not report on the part of the article that referenced the housing market. One quote we went back for is:

Ottawa has moved four times in as many years to tighten mortgage rules to keep marginal buyers out of the market, most recently in August.

That the Canadian Finance Minister is sufficiently “concerned” (widely reported in the media for example Jim Flaherty concerned about Canadians mortgage debts) about household mortgage debt to repeatedly introduce measures to dampen it is monumental. An expression of “concern” from authorities is as close to an admission of the existence of a bubble as we will get. No minister is going to come out and say that the housing market is in a bubble and will contract by some number, say 30%.

We have long been aware of the close parallel between the US and Canadian economies on two dimensions, growth in house prices and growth in household debt. In the US, the combination resulted in a crash in prices that may still not have bottomed. The Canadian numbers are even worse than the US numbers making a housing crash a possibility here.

A more in-depth analysis of the situation is given in this post by Pater Tenebrarum of Acting-Man blog titled Is Canada’s Housing Bubble ‘Different’? In it he would seem to conclude that Toronto and Vancouver a re in housing bubbles. He has an interesting take on Canadian commercial banks to mortgage debt default exposure.

We would sum the situation up as having Toronto and Vancouver in definite local bubbles which are due for correction. Unfortunately, the effects will be felt in all markets.

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