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Why Moody's, Fitch are worried about Canada's housing market, consumer debt

These are stories Report on Business is following Tuesday, Jan. 29, 2013.

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Moody's, Fitch warn on debt
Two major rating agencies are sounding alarm bells over the level of consumer debt in Canada, and the outlook for the housing market.

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As The Globe and Mail's Grant Robertson reports, Moody's Investors Service downgraded the ratings of several of Canada's banks yesterday, citing the potential for trouble. Among those downgraded were Toronto-Dominion Bank, which lost its triple-A ranking, Bank of Nova Scotia, Bank of Montreal, Canadian Imperial Bank of Commerce, National Bank of Canada and Caisse Centrale Desjardins.

Both Moody's and Fitch Ratings, which reaffirmed the levels of the major banks, stressed that the country's banks are sound, but they're concerned over some issues, and how they could affect the financial services industry.
"The main domestic threat to the stability of the Canadian banks is the record level of consumer indebtedness and the risk of overvaluation in the housing market," said Fitch.

"Between 2001 and 2012, Canadian home prices appreciated by approximately 116 per cent and the household debt-to-disposable income ratio increased to 166.7 from 108.3," it added in its statement.

"These increases are set against a backdrop of unemployment remaining above 7 per cent and GDP growth hovering in the 2 per cent to 3 per cent range."

Moody's issued a similar statement, though with a different timeframe, citing a rise of 20 per cent in house prices since November 2007.

The steam has, of course, come out of the Canadian housing market, with sales cooling rapidly, particularly since Finance Minister Jim Flaherty moved in the summer to tame credit growth with new mortgage restrictions.

And according to the Bank of Canada, credit growth has in fact slowed, though was still, at its last measure, outpacing the growth in incomes.

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Trouble in West
A new report from Canadian Imperial Bank of Commerce warns that a combination of troubles have "dimmed the lights" for the country's resource-rich provinces, while other regions are picking up nicely.

Indeed, said the report released today by CIBC World Markets, the "provincial economic and fiscal playing field is now more evenly balanced than at any time in the past decade."

According to CIBC's Warren Lovely and Emanuella Enenajor, pipeline constraints, a hot topic in Canada, along with the troubles in Europe in weakness in emerging economies, are pressuring the resource provinces.

With the exception of Ontario and Newfoundland and Labrador, the economists cut their projections for economic growth in all of the provinces for this year, though some of the weakness in the resource regions are due to temporary factors.

"Expect some of that weakness to be recouped in 2013," Mr. Lovely and Ms. Enenajor said.

"But Canada's resource sector - still a very big part of the country's long-term growth plan - faces a more difficult road ahead. With global real GDP growth decelerating to 3 per cent this year, a sideways profile for some key commodity prices could dampen fortunes in Canada's West."

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They put their finger on a key issue dogging Alberta, that of not being able to get western oil to eastern refineries, meaning a huge discount in the price of its oil to global benchmarks such as West Texas Intermediate and Brent.

Alberta Premier Alison Redford referred to this just last week as a "bitumen bubble."

"That has triggered a substantial falloff in provincial royalties and, as some recent announcements highlight, jeopardizes investment and job prospects in the oil patch," said Mr. Lovely and Ms. Enenajor.

"While a number of long-term solutions have been proposed, there's simply no quick fix. Of relevance to B.C. and others, prices for natural gas have languished in response to surging U.S. shale gas production, while cheaper levels for some minerals serve as a threat to Canadian mining sector activity more generally."

Ford disappoints on Europe
Ford Motor Co. posted stronger-than-expected fourth-quarter results today, but disappointed markets on a weak outlook for Europe.

Ford earned $1.6-billion (U.S.), or 40 cents a share, compared to $13.6-billion or $3.40 a year earlier, but the 2012 results were inflated by a tax issue.

The problem for the auto maker is that it projects a $2-billion loss in Europe this year, following a loss there of almost $1.8-billion in 2012.

"Ford is being adversely impacted by higher pension costs due to lower discount rates, and a stronger euro," the auto maker said.

"The business environment remains uncertain, and Ford will continue to monitor the situation in Europe and take further action as necessary," it added.

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About the Author
Report on Business News Editor

Michael Babad is a Report on Business editor and co-author of three business books. He has been with Report on Business for several years, and has also been a reporter and editor at The Toronto Star, The Financial Post and United Press International. His articles have appeared in major newspapers around the world. More

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