by David Thorpe
July 2011
There has been much written about William and Kate’s high-profile tour of Canada. It has captured headline writers attention around the world and placed the role of the “modern” Royal Family firmly under the media spotlight. Much of this debate was taking place in Canada before they arrived, during their visit and well after they left. So you could be forgiven for having missed some of the comments made by the Canadian Finance Minister, Jim Flaherty, on events taking place in Europe. “There is a real danger of contagion stemming from the situation in Europe” he told a conference of international insurance professionals meeting in Toronto. While the direct exposure that Canadian banks and insurers have to Greece is relatively minor, Mr Flaherty said the situation has the ability to impact the financial system globally if it’s not dealt with. That being said, he added he expects it will be resolved.
Last month I found myself visiting our Canadian offices which are located just outside of Toronto. Having been there many times before I was interested to hear myself how my colleagues at First Canadian Title felt the mortgage market was performing given Mr Flaherty’s comments. Last year they seemed to be faring reasonably well despite the global economic downturn. It would be good to hear some positive news I thought, particularly as according to the Nationwide index, UK house prices hadn’t changed between May and June and were in fact 1.2% lower than this time last year. In the US things looked just as bleak. US prices had fallen again in April but at least the pace of the fall appeared to be slowing. So what was going on in Canada?
Well for a start what about those hockey riots? For those of you unfamiliar with the number one Canadian sport, the Vancouver Canucks were beaten by the Boston Bruins in the Stanley cup in June and Vancouver erupted. There were over 100 arrests and pictures were broadcast around the globe showing scenes of violence and destruction which could have been filmed in, well amongst other places, Greece. How could this happen in a place like Vancouver? Wasn’t this the same city that brought us those spectacular winter Olympics only a year ago? Wasn’t it also the same place that was being linked to a Canadian property bubble?
Well I was as surprised as anyone to hear the word ‘Bubble’ being used. This word has more recently been used to describe various housing market in South East Asia but surely not in North America? Well the more you dig into it, for a whole number of reasons, the more unlikely a widespread Canadian property bubble appears. Vancouver however might however turn out to be the exception. There is some anecdotal evidence to support the theory that property hungry Chinese investors are looking to snap up properties in Vancouver. What is undisputable is that prices in the city have exploded over the last two years and it now takes 11 –times the typical family’s average annual income to buy a home. That’s double the national average and this has left many people fearing what happens next. Some of them are even taking to the streets....
Notwithstanding what might or might not be happening in Vancouver and despite the challenging international environment, the Canadian financial system remains healthy. For example, asset quality of Canada’s major banks has improved further in recent months. The main source of concern continues to be a familiar one. That is the high level of debt carried by Canadian households in relation to their disposable income. So nothing new there then. Bank of Canada Governor Mark Carney has been vocal on the need for Canadians to cut their hefty debts as the central bank contemplates the impact of a financial shock on overburdened consumers. Some forecasters are clearly worried that Canadians could continue to borrow faster than their incomes rise, leading to an unsustainable debt burden among households. The good news is that household debt has cooled notably in recent months. April’s 5.5 per cent year over year was the slowest pace since early 2002. However there are many people who believe that some further cooling is required, especially on the mortgage side, in order to stabilise household debt ratios.
In the meantime many Canadians will be eyeing events in Europe and particularly in Greece with some degree of trepidation. But there is little they can do about any of that and instead they must focus on domestic issues and in particular household debt. Despite strong warnings from the Bank of Canada about rising personal debt, Jim Flaherty has said quite recently that he has no plans to tighten mortgage rules again stressing that the real estate market remains healthy. There is also a view that household debt will stabilise when interest rates begin to rise in the year ahead. Let’s hope it does because otherwise Canadian mortgage lenders can expect another dose of regulation.