We are now in the end game of a massive experiment, which is clearly failing. That experiment, cooked up by central banks, and with support from Government meant that interest rates and mortgage rates dropped, lending criteria loosened, and home prices shot up dramatically. The final phase of the up was through COVID when quantitative easing again drove debt higher, whilst luring households into a false sense of security – remember not rate rises til 2024?
But now, it’s all coming unglued as rates are rising, and the debt burden is becoming overbearing. Take Canada for example – based on a recent EBC report. They say that sky-rocketing home prices earlier in the pandemic raised the bar by several notches for Canadian buyers. But the spike in interest rates since March served a crushing blow in parts of the country.
http://www.martinnorth.com/
Go to the Walk The World Universe at https://walktheworld.com.au/
Today’s post is brought to you by Ribbon Property Consultants.
The tightening continues, as the Bank of Canada joined the party once again and delivered a fourth consecutive outsized interest-rate hike in a bid to slow the nation’s economy and drag inflation down from four-decade highs.
The Bank of Canada’s decision was a statement-only affair with no new forecasts.
Monetary authorities around the world are slamming on the brakes to halt a post-pandemic surge of inflation. The Reserve Bank of Australia raised its policy rate by a half-percentage point on Tuesday, and Banco Central de Chile also stunned investors with a 100-basis-point move. The European Central Bank is poised to deliver a 75-basis-point hike on Thursday and the US Federal Reserve meets later this month, with an increase of at least 50 basis points expected. The rate hike pass-the-parcel is going to continue for some time, which begs the question, at what point will the music stop? Given the embedded nature of the inflation shock, it’s probably more a symphony than a song.
Go to the Walk The World Universe at https://walktheworld.com.au/
Canada is an interesting analogue to Australia in so many ways, with its reliance on resources and massive exposure to property. Indeed, prices in some centres boomed through the recession. But now property values are falling, and further drops are expected. So today we look at analysis from Canada thanks to RBC Economics.
Go to the Walk The World Universe at https://walktheworld.com.au/
It is becoming a new sport, it seems – trying to assess the potential fall in property values across many markets here and around the world.
Indeed, Christopher Joye in the AFR writes: the great Aussie housing crash is accelerating, and it is being driven by the fastest and largest interest rate shock households have faced in modern history. Sydney house prices have now plunged almost 5 per cent since their peak only months ago according to CoreLogic. Home values in Melbourne are not far behind.
But let’s look at another market, because property price falls are being predicted around the western world, as Central Banks, appear at least, to be coordinating rate rise increases.
We might want to pause to consider the group-think, which has been exhibited for the past two decades – cutting rates after the 2007 and 2008 crisis, cutting them again radically ahead of COVID, to say nothing of the quantitative easing which has flooded markets with cheap money, and rate control, plus handing ultra-cheap funds to banks. I will leave you to judge how independent each central bank was and the degree of collusion, versus common reactions to the same economic out-turns, but the current mode of operation is driving highly inflated home prices which were driven by their bad policy – sharply down as they tighten. Some would suggest the High Priests of Finance, are not as powerful as they may like to appear.
So, let’s look at Canada’s housing market which has sharply shifted since the Bank of Canada began raising its benchmark interest rate from record lows in March. The central bank, seeking to rein in inflation that is running at its hottest in four decades, unveiled its largest one-time interest rate hike since 1998 last week. It raised the benchmark rate a full percentage point to 2.5% and promised more increases to come.
Go to the Walk The World Universe at https://walktheworld.com.au/
In today’s show we look at the implications of the stronger CPI number for the RBA Cash Rate, what banks are doing to prepare for higher rates, and what Canada already has in play. Plus some data on regional migration which confirms our own surveys.
The latest edition of our finance and property news digest with a distinctively Australian flavour.
Go to the Walk The World Universe at https://walktheworld.com.au/
Today’s post is brought to you by Ribbon Property Consultants.
If you are buying your home in Sydney’s contentious market, you do not need to stand alone. This is the time you need to have Edwin from Ribbon Property Consultants standing along side you.
Buying property, is both challenging and adversarial. The vendor has a professional on their side.
Emotions run high – price discovery and price transparency are hard to find – then there is the wasted time and financial investment you make.
Edwin understands your needs. So why not engage a licensed professional to stand alongside you. With RPC you know you have: experience, knowledge, and master negotiators, looking after your best interest.
Shoot Ribbon an email on info@ribbonproperty.com.au & use promo code: DFA-WTW/MARTIN to receive your 10% DISCOUNT OFFER.
Canada just announced a dial-down of their quantitative easing programme, but given the current trajectory of the virus, and the debt overhang, is a U-Turn even possible?
Go to the Walk The World Universe at https://walktheworld.com.au/
I discuss the latest with Formafist in Canada and we compare the two markets in terms of property and the broader economy. How has 2019 been and what is 2020 looking like? Some amazing parallels, and stark differences….
This segment covers the Canadian market, and the other half of the discussion, covering the Australian market is available on Daniel’s channel here:
What’s been happening to house prices and sales volumes over 2019, what’s changed in the year
What’s happened to foreign buyers?
What’s happening to Investors?
Any news on building construction, quality, new approvals?
How about the broader economy, and interest rates?
Biggest surprise of the year
Looking ahead, thoughts on next year,
Will home prices, and volumes go up or down, (what might determine that)
Will interest rates be cut or raised by central banks?
What’s the biggest thing to watch for… in each market…
On 14 June, the Canadian Real Estate Association (CREA) reported that May home sales rose 1.9% nationally from April, says Moody’s. The report confirms other recent data suggesting that macro-prudential measures the Canadian government has taken to cool extreme houseprice appreciation over the past five years have been successful in engineering a “soft landing,” easing market concerns that some of the country’s more expensive markets such as Toronto and Vancouver were poised for a major correction. CREA now predicts home sales nationally will rise a sustainable 1.2% in 2019, a reversal from a previous forecast for a drop of 1.6%.
Reducing elevated house-price growth without triggering a severe correction in housing markets supports financial stability in Canada’s banking system and reduces the prospect of rapid consumer deleveraging, which would pressure Canadian bank asset quality. Although Canadian banks’ mortgage portfolios are relatively resilient, unsecured consumer exposures would generate substantial incremental loan losses under the stress of a major housing price correction. This would pressure profitability at the Canadian domestic systemically
important banks (D-SIBs) and be detrimental to their strong credit profiles. The D-SIBs are Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Royal Bank of Canada, The Toronto-Dominion Bank and National Bank of Canada. Rising house prices in the major urban areas of Toronto and Vancouver have been the main driver of the growth in Canadian residential mortgage debt to almost CAD1.9 trillion (about 95% of GDP) as of 31 March 2019. Roughly 50% of domestic banking assets are residential mortgages. Positively, about 85% of Canadian mortgage debt is in disciplined amortizing structures, which are lower risk than interest-only home equity lines of credit (HELOCs).
Policy decisions by the national and several provincial governments, including the tightening of mortgage eligibility requirements, have stabilized prices somewhat in recent quarters. We expect a more sustainable growth rate in housing prices over the next year, as supported by the CREA announcement.
A significant number of Canadian mortgages are explicitly backstopped by the Canadian government through Canada Mortgage and Housing Corporation (CMHC, Aaa stable) insurance, and the loans’ historical credit quality is high. However, federal initiatives to reduce the government’s exposure to housing risk have reduced the proportion of insured mortgages to about 33% at 31 March 2019 from 47% at 31 March 2014.
Structural features of the Canadian mortgage market also buffer banks against the effects of a housing shock: mortgage loans are full recourse, securitization and broker origination levels are low, payments are not tax-deductible and the level of subprime loans is low.
Banks are not invulnerable to losses on mortgages in a stress scenario, but losses would be moderate relative to strong capitalization and earnings. The non-mortgage consumer loans of Canadian banks are relatively more prone to rapid deterioration in the event of an economic shock, especially given high household indebtedness. These exposures also have higher expected loss given defaults than real estate secured debt. We expect increased provisions for credit losses on consumer portfolios over the next year, starting from a low base, with the potential for more significant asset quality deterioration in the event of an economic shock. Evidence of a moderation in housing price growth rates reduces the prospect of this risk.
