Briefing highlights
- Home equity loans on the rise
- Poloz: Will he or won’t he today?
- Toronto home prices extend slide
- Global stock markets mixed
- New York poised for stronger open
- Loonie just shy of 81 cents
- Canada’s trade gap narrows
Define precarious: When households borrow billions more against their homes each and every month, and then interest rates rise.
That's a recent trend in Canada that economist Laura Cooper believes is worth pointing out, particularly since the Bank of Canada just raised its benchmark interest rate and is poised to do so again, possibly as early as this morning.
Canadians are known around the world for what the Royal Bank of Canada economist called their "voracious appetite" for debt.
Some of that has eased of late as federal and provincial governments try to deflate housing bubbles largely in the Vancouver and Toronto areas, and the central bank's move to a tightening cycle, but the pace of consumer credit is picking up even as growth in mortgages slows.
Like other economists, Ms. Cooper believes Canadian borrowers will be able to handle the higher cost of their debt, but many are vulnerable.
"A notable shift in major housing markets alongside elevated household indebtedness and tighter financial conditions are likely to dampen credit growth and eventually temper consumer spending growth," she said in a report.
"We anticipate that households on the whole will be able to absorb rising costs given an expected gradual pace of policy tightening and ongoing hiring gains. But as is the case with all goods things – the borrowing binge is likely coming to an end."
But the shift – consumer credit balances swelling by $10-billion to $12-billion in each of the last four quarters – certainly ups the ante.
"Lines of credit – and consumer credit in general – tend to be tied to variable rates, so the ramp-up increasingly leaves households exposed to higher interest rates," Ms. Cooper said later.
"While the pace of growth remains low when compared to the rates seen leading up to the 2008/09 recession, there are risks alongside the uptrend given exposure to rate increases."
Some of Ms. Cooper's points:
1. Most of that $10-billion to $12-billion was borrowed from banks, largely via lines of credit, and specifically home equity lines of credit, or HELOCs. Indeed, those accounted for more than half of the overall growth in the second quarter, the most they've represented since 2011.
2. Overall household credit balances climbed in July by 5.7 per cent from a year earlier, or the fastest since October, 2011: "This compared to a recent low of 2.6 per cent in January, 2016, and resulted in the amount of debt owed by Canadians climbing to nearly $2.1-trillion."
3. The consumer credit portion of that, from personal loans to plastic, rose 4.4 per cent, for the fastest since February, 2011: "An uptrend in consumer credit accumulation has continued relatively unimpeded since early 2016 and is now well above the cycle-lows seen in the latter half of 2013 – before the Bank of Canada cut policy rates in response to the crude oil price plunge."
4. Mortgage borrowing, having eased last year amid a "minimal dampening effect" from federal qualifying measures, perked up in the first half of this year: "But higher borrowing rates against a backdrop of regulatory change – notably Ontario's Fair Housing Plan introduced in April – are expected to dampen housing demand and, consequently, slow mortgage growth over the coming quarters."
At this point, delinquency rates are stable, according to Equifax Canada.
"In Alberta, the delinquency rate increased by just 1.7 per cent compared to a year ago, following two years of larger quarterly increases," Equifax said in a second-quarter report.
"Ontario, PEI and B.C. saw lower delinquency rates, with decreases of 8.1 per cent, 10.6 per cent and 9.8 per cent, respectively."
(Of course, if you're one of Alberta's 1.7 per cent, you might not find the numbers all that stable.)
The Bank of Canada shifted gears in mid-July and raised its key overnight rate by one-quarter of a percentage point to 0.75 per cent.
Last week's strong reading of economic growth in the second quarter – an annual pace of 4.5 per cent – now has some observers expecting a second hike today.
That's not a given, and others still see the next hike coming in October instead.
But whether it's today or next month, another quarter-point hike is coming.
"The period marked by a voracious appetite for debt accumulation may thus be nearing its end," Ms. Cooper said.
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What to watch for today
As noted, the big question is will he or won't he: Governor Stephen Poloz and his Bank of Canada colleagues announce the decision at 10 a.m. ET.
So will he?
Avery Shenfeld, chief economist, CIBC World Markets: "Nudging interest rates a quarter-point higher is clearly warranted after a scorching first half. We don't need rates this low to generate decent growth, and can ameliorate future financial system risks by easing household credit demand."
Won't he?
Dina Ignjatovic, economist, Toronto-Dominion Bank: "Following the GDP report, odds of a rate hike in September edged up. However, given that there has been no communication from the Bank of Canada since its last meeting, we would be surprised to see a move next week. We do expect the rate hiking cycle to continue, though, with a 25-basis-point hike in October, followed by two more in 2018."
Might he?
Dana M. Peterson, economist, Citigroup: "We posit a roughly 50-50-per-cent likelihood that the BoC surprises markets with a hike [today], but maintain our call for no action given weak underlying inflation, and downside risks stemming mainly from the U.S., that may prompt the bank to wait until October for greater clarity. Moreover, the sizable moves in bond yields since July obviate the need for action now."
Read more
- John Heinzl: Loonie’s strength complicates Bank of Canada decision
- Barrie McKenna and Mark Rendell: Canada’s fast GDP growth raises spectre of more rate hikes
Prices slide
Home prices continued their multi-month slide in the Toronto area in August, driven by falling demand for detached houses even as condominium prices climbed, The Globe and Mail's Janet McFarland reports.
The average home in the Greater Toronto Area sold for $732,292 in August, a 20.5-per-cent drop from the market's peak in April, when prices for all types of homes averaged $920,791, according to the Toronto Real Estate Board.
Compared to a year ago, the average price for a home in the GTA is up just 3 per cent, which means a four-month drop in prices since April has eroded almost all of the gains the Toronto market recorded late last year and earlier this year.
Here's a breakdown of prices across the region:
Source: Toronto Real Estate Board
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Stocks mixed
Global markets are mixed at this point amid the "North Korean shakedown."
Tokyo's Nikkei lost 0.1 per cent, and Hong Kong's Hang Seng 0.5 per cent, while the Shainghai composite gained marginally.
In Europe, London's FTSE 100 was down 0.4 per cent by about 8:15 a.m. ET, while Germany's DAX and the Paris CAC 40 were up by between 0.2 and 0.6 per cent.
New York futures were up after Tuesday's tumble, and the Canadian dollar was just shy of 81 cents (U.S.) in the run-up to the Bank of Canada decision.
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Trade gap narrows
Canada's trade deficit narrowed in July but still tallied a hefty $3-billion.
Imports tumbled 6 per cent, outpacing the 4.9-per-cent drop in exports, leading to the lower shortfall from June's $3.8-billion gap, Statistics Canada said. Both declines were largely because of lower prices.
Remember, the Canadian dollar surged against the greenback in July as the Bank of Canada moved to a tightening cycle.
"As the loonie continues to push stronger, trade fundamentals are pointing the other way," said Royce Mendes of CIBC World Markets.
"Prices did play a significant role, but weaker volumes also contributed and point to a slowdown in growth in the third quarter," he added.
"Declines in key manufacturing areas, namely autos, suggest a weak monthly report for that sector, and as a result the monthly GDP result as well."