Late to the party...

S and P has done it- they downgraded Canadian Banks based on consumer indebtedness and exposure to the housing bubble (my words)


This is exactly what us chicken little bears have been saying for several years. THIS WILL NOT END WELL. Over-priced housing puts the whole system in peril. Banks,  Provincial, Local and National Governments.


The myth of the rock solid Canadian financial sector and our economic miracle has been exposed to be: the luck of being resource rich and pumping housing by drawing in future demand, dropping rates to zero, transferring the risk to the tax-payer and lax lending. The result.. well we are about to experience that and it gives me no pleasure to say that many of us saw this coming.

S&P: Outlook Negative on BNS, LB, NA, RY & TD

July 27th, 2012

Standard & Poor’s announced:

it has revised its outlooks on seven Canadian financial institution ratings to negative from stable. The financial institutions are:

• The Bank of Nova Scotia
• Central 1 Credit Union
• Home Capital Group Inc.
• Laurentian Bank of Canada
• National Bank of Canada
• Royal Bank of Canada
• Toronto-Dominion Bank

At the same time, Standard & Poor’s affirmed its ratings on all seven banks.
…
The outlook revisions are linked to our evolving views of economic risk and industry risk for banks operating in Canada. A prolonged run-up in housing prices and consumer indebtedness in Canada is in our view contributing to growing imbalances and Canada’s vulnerability to the generally weak global economy, applying negative pressure on economic risk for banks. Growing pressure on banks’ risk appetites and profitability arising from competition for loan and deposit market share could also lead to a deterioration in our view of industry risk.
…
The negative outlook recognizes the potential for deterioration of Canadian banks’ financial performance and capitalization generally, associated with consumer debt burdens proving excessive in an unfavorable economic scenario, or due to competitive pressures amplified by the shift to a consumer deleveraging phase.
Over the past decade, Canadian consumer credit market debt (including residential mortgage loans and consumer credit) has risen to more than 150% from 110% of disposable income, and relative to GDP, consumer debt has increased to more than 90% from about 70%. Over the same period, Canadian house prices have approximately doubled, with compounded real growth in housing prices estimated to be about 5% per year.
…
Bank risk profiles have benefited from Canadian banks’ underwriting practices, stable performance metrics for banks’ credit portfolios, and the sharing of mortgage risk between the banks, the borrowers (extensively based on full recourse to the consumer), and the providers of mortgage insurance, notably the Canada Mortgage and Housing Corporation (AAA/Stable/A-1+). In our view, Canadian banks’ risk tolerances and risk management capabilities are generally strong and attuned to risks inherent in the Canadian consumer and housing sectors. Even so, we believe there is currently growing potential for deterioration of Canadian bank credit profiles associated with scenarios incorporating consumer sector stress.

Systemic factors are incorporated in Standard & Poor’s rating methodology primarily through its Banking Industry Country Risk Assessment, or BICRA. The BICRA framework takes into account economic and institutional risk factors present in the environment in which banks operate. Canada’s BICRA is currently set at ‘1′ (lowest risk) on a 1 to 10 scale. The BICRA component of the analysis is intended to highlight emergent systemic risks that may not be fully apparent when viewing the sector at the level of individual banks

Must listen to...

Garth Turner on the Howe Street channel.


How we got here and how it is changing big-time!


For those who think 'we are different'. Garth explains the situation where banks gave cash-back mortgages...ie they gave someone with no skin in the game, the 5% deposit and the CMHC (tax-payer) insured the other 95%!


So no incentive for the lending institution to be sensible since they are throwing the risk right at the CMHC. The mortgage broker gets a commission IF the deal is done, not for being cautious. The bank manager builds up his book. The CMHC gets to pump up it's chest and the buyer, seller and realtor are all happy.


So who loses? We all do, when this ponzi scheme come apart.

Who's fault is it that the` volume and price of homes fell in Canada last month?

Not Flaherty's- he hadn't brought in his mortgage changes yet.


Vancouver- according to Sherry Cooper it's our fault. We brought the class average down. Sorry, I know some of you find her voice grating :


Bad little old Vancouver


But don't worry too much. This is not the US for goodness sake. They had much more lax lending than us. We only had a few Billion HELOC here and a few Hundred Billion high-risk mortgages insured there.


Oh and of course we won't worry that our per capita debt is now at their pre-bust levels.


And we know why we are having a bad time in lotusland. Not enough Chinese money washing ashore this year:


Hat tip Best place on Meth  The video shows the invasion of money slowed to a trickle,  however we do know that the Chinese Government is loosening the spigots a bit, so we may have a few more Government officials on 50K salaries buying $2M westside homes :)

Very few buys but big sticker's

Volume has really ground to a halt, despite talk on the media of buyers diving in to beat the changes in the mortgage rules which come into effect this Sunday.


Maybe we will see a huge spike in the sales numbers on Monday as last minute buys hit the MLS or maybe buyers have had their epiphany.


Maybe they realised that if they cannot afford to buy a house at the lowest ever interest rates, rigged with Tax-payer insurance for their default, with just a 5 year change in amortization period from 30 to 25 - then they shouldn't buy it!


In any case some lenders started implementing the changes sooner than July 8th .


Meanwhile the really big money, not concerned by questions of CMHC insurance is still buying.


eg West Van has 7 new SFH listings yesterday, 3 price changes and just one sale, a remarkable $3.3 Million under the original asking price! However the sale price was still $8.08 Million.


That sort of huge number will distort the median and average prices up when over-all volume is so low. There was another high ticket sale on the Westside with anemic sales too.


So we will get some skewing in the prices as the lower end (which is now about one MILLION dollars!) pulls back, while big local, Albertan and off-shore money can still buy the upper end. None of this will change the trajectory, but low volumes have this effect.

FVREB and REBGV Stats Package

FVREB


Sales down 9% YOY. Listings up 5% YOY. MOI over 7. YOY HPI - flat apartments and flat attachment, but SFH up 3.6%. Gotta love that HPI secret sauce, it keeps giving and giving.


Here are the numbers


REBGV


Wording changed to 'buyer's market!'
27.6% less sales that last year. 32.2% below June average.
3% less listings than last June.
List to sales of 13% worse than the FV! (FV is nearer fair value than Vancouver FWIW)
MOI nearer 8 than 7.
Benchmark SFH increased 3.3% YOY. Flat Apartments. Flat Attached. There's that HPI/ Benchmark again. Terrible stats. Average at 2010 levels and yet the HPI for SFH will not go down. The secret sauce that is sooo good, like KFC. Down ask what's in it, just enjoy it.


Here is the stats package. Thanks to VMD who up-loaded it to google.


Two Realtors were on the CBC radio afternoon show discussing the terrible stats for June. One said that it was the media that were whipping negative things up- what?! Our 'Newsapers' are little more than advertising rags pumping the RE industry.


The other one said that anyone who buys now and intends to stay put for five years will be ahead. Well lets look at the HPI for 5 years. We are still very near the top of the bubble, even so the 5 year HPI is negative for the following areas:


SFH-


Whistler, Sunshine Coast and Bowen Island


Apartments-


Burnaby East (-7%), Maple Ridge (-10.8%), Pitt Meadows ( -11.8%), Port Coquitlam and Port Moody, Squamish and West Vancouver.


Attached-


Maple Ridge, Pitt Meadows.


If we continue with negative growth over 5 years and we know that  renting is cheaper than buying, often a lot cheaper, then being ahead over five years is not a sure thing by any means.

We did it

Look at Larry's graph, it shows we did break the previous lows for SFH average prices.


I think this will have a significant effect on RE psychology in this bubble city. 


Expect a rear-guard defence from the RE interests claiming that this is a buying opportunity and when that fails that RE must be supported or we will be in economic trouble (which we could well be). 


Finally, Bears will be blamed as lacking civic responsibility for wishing the demise of the RE bubble. As if wishes have anything to do with it. To be honest these bogs have very little effect on the market, despite all the words and time we expend on them over the years. They have almost no effect compared with the ill-thought out actions of doubling the CMHC cap or dropping rates to near zero.


 Have a great Canada day!