Housing affordability improves; Canada’s trade deficit nears record; Banks still not touching residential real estate

Housing affordability improves

RBC released their quarterly housing affordability publication today.  The data was from Q3 of this year, representing the July to September period.  Not surprisingly given the drop in bond yields and fixed mortgage rates and a slight decline in year-over-year home prices, the housing affordability measure actually improved for the first time since Q2 2009.

Not much to get too excited about yet.  Affordability is still well below levels that dominated the past 15 years, and that is with record low interest rates to boot.

Speaking of those record low interest rates, it may be worth noting that it will be difficult to repeat this reading of increasing affordability unless home prices are moving downwards.  The July to September period of this year was marked by a declining 5 year bond yield.  The big banks responded by cutting their benchmark fixed interest rates, upon which the affordability calculations are made.  That trend is now reversing as you can see in the recent movement in the 5 year bond yields:

And as expected, banks are once again hiking their fixed rates.  With interest rates rising of late, it will mean that either incomes must rise or house prices must fall to get a second straight improvement in housing affordability.

Also of note, the national average affordability continues to mask some ridiculous affordability readings:

It doesn’t bode well for the future direction of real estate in a city when people spend 50 to 60% of their income just to carry the cost of a home.  The real issue is being masked by extremely low interest rates.  We’ll see how things change when interest rates rise (inflation) or when incomes fall and unemployment rises (deflation and austerity).  Either way…..it’s not good.

Banks still not touching residential real estate

Today Stats Canada released their updated residential mortgage credit figures.

Two particularly noteworthy trends are the decrease in residential mortgages held by the banks (they know when to drop a bad investment) and the massive 45% increase in mortgage backed securities between 2008 and 2009.  MBSs now account for nearly 30% of the entire outstanding mortgage market and virtually 100% of the new growth in mortgages.

It’s not a hard sell to investors:  Make a slight premium over Government of Canada bonds, yet still enjoy the full backing of the Government on any potential default.  It’s a deal made in heaven…..unless you’re the taxpayer on the hook.

Trade deficit nears record

Canada’s current account deficit widened even more than expected in Q3 to a record shortfall of $17.5 billion (or $70.1 bln annualized) from a revised $13 billion ($51.9 bln a.r.) gap in the prior quarter.

As noted by RBC:

“The overall current account gap represents about 4.3% of GDP….That’s up from 3.2% in Q2, and 2009’s result of 2.8%.  Putting that in perspective, the U.S. current account deficit for all of last year was 2.7% of GDP, but likely widened to around 3.5% of GDP in Q3…In other words, one of Canada’s twin deficits is now actually worse than its U.S. counterpart and, at over 4% of GDP, is in the problem zone identified by U.S. Treasury. It’s also close to the record gap of 5.2% of GDP in 1975Q1.”

Canada suddenly finds its broadest trade deficit in the company of countries that have typically been cited as extravagant overspenders/undersavers.While this may prove to be a passing phase, it is an early warning that the country may be living beyond its means.”



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7 Responses to Housing affordability improves; Canada’s trade deficit nears record; Banks still not touching residential real estate

  1. jesse says:

    The securitization of mortgages is one of the largest systematic risks in the Canadian household debt composition. Based on strong words from Carney directed to banks I wouldn’t be surprised if the government yanks the carpet a bit in the next while.

  2. Taipan says:

    Very solid comments ben. It was almost as if id written this myself.

  3. John in Ottawa says:

    The GDP numbers are out for the 3rd quarter and September. No surprises there. Unemployment will remain high through the holiday season.

    From Statscan:

    Lower exports (-1.3%) and lower investment in housing (-1.3%) restrained GDP growth.

    Expressed at an annualized rate, real GDP grew 1.0% in the third quarter, after expanding 2.3% in the second quarter. In comparison, real GDP in the United States grew 2.5% in the third quarter.

    This is a very weak report.

  4. Tim Foxon says:

    Hi Ben.

    Thanks for your very useful comments.
    Regarding your observation re 5 year rates.

    My thought is rates are backing up for technical rather than fundamental reasons.
    I think rates dropped on buying in anticipation of QE2, then backed up when it became real (buy on the rumour sell on the news).

    Although the backup started at the long end the main action was in the belly of the curve 5-10 year. The unwinding looks exhausted now as the long end seems to have topped out and is headed down, followed in the last few days by the 5-7 year.

    Inflation (as measured by 30 year minus TIPS) isn’t moving at all, so the market doesn’t seem to be anticipating CPI inflation.


  5. Bruce says:

    Benjamin Tal Quote:

    While “the next few quarters are safe” from Bank of Canada rate hikes, Tal said Canadian consumers are “exhausted” due, in part, to a 146% debt-to-income ratio, and as a result, it won’t take many rate hikes in future to slow the economy. Tal also indicated a housing crash wasn’t in the cards. For that to happen you need two things, higher interest rates and poor quality mortgages, both of which are absent in Canada. “The trend of the vulnerable sector is declining as a share of the mortgage market,” he said.

    Bruce quote: Are you freaking kidding me!

    This was given at the last CAAMP conference in Montreal. Bank economists will tend to only tell a fraction of the truth. They will spin anything to push continued undisciplined growth at any cost regardless of the obvious fundamental economic issues. The the that kills me is they know. Many real estate agents are just uninformed, and selling based on emotion we can be angry at them but they honestly don’t know. (Therefor they should not be advising which is besides the point). But I have no faith in bank economists.

  6. Pingback: Housing Affordability Improves; Canada’s Trade Deficit Nears Record; Banks Still Not Touching Reside

  7. Pingback: Headwinds Revisited: Canada’s Q3 GDP Slows Markedly, Turns Negative in September

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