Canada

1
Canadas Strained Housing Markets
March 7, 2013
Derek Holt Vice-President, Scotiabank Economics
2
Outline

• 1. Macro backdrop the Bank of Canada
• 2. Canadian Housing
• Strains
• Mitigating Factors
• Why Its (Somewhat) Different From the United
  States
• Pockets Of Concern

3
The Macro Backdrop BoC On Hold Throughout
2013-14
4
Spare Capacity Will Prevent The BoC From Hiking
Through 2013-14
Even The BoCs Output Gap Doesnt Go Into Excess
Demand By 2014
5
Canadas Current CPI Softness Could Be Returning
Us To The Past
6
Among The Worlds Best Corporate Balance Sheets
Source Statistics Canada, Quarterly Survey of
Financial Statements, Scotia Economics
7
Canadian Housinga. The Strains
8
Canada Is At A Cycle Top In Housing
Source K\DATA\CANADA\Housing\Home Ownership.xls
Source Statistics Canada, Census of Population,
U.S. Census Bureau, Housing Vacancy Survey, U.K.
Office forNational Statistics, Census of
Population, Australian Bureau of Statistics,
Census of Population and Housing.
9
Canada Is At An Exhausted Point In The Consumer
Cycle
Real consumer spending indexed to 2007Q1 100
Canada
US
Euro zone
Japan
U.K.
Source OECD, Eurostat, UK National Statistics,
Scotiabank Economics.
10
Canadian Renovation Spending At A Record High
Canadian Renovation Spending
C bns, nsa, 4-quarter moving average
of personal disposable income, nsa, 4-quarter
moving average
Source MLS, Statistics Canada, Scotiabank
Economics.
11
Sharply Cooling Canadian Housing Resale Markets
12
Canadian House Prices In Early Decline Phase
13
Home Price Indices Repeat Sales Metric
indexJan 2000100
Canada Teranet National Bank House Price Index
US Case-Shiller Home Price Index
Source Teranet National Bank House Price Index,
SP/Case-Shiller Home Price Index, Scotiabank
Economics.
14
Canadians Have Higher Debt But Stronger Balance
Sheets
Canadians Debt-To-Income Now Higher
But Less Debt Used To Buy Assets
household credit liabilities as of disposable
income
household debt as of assets
US
US
Canada
Canada
Includes households, non-profits and
unincorporated business.Source U.S. Federal
Reserve, Statistics Canada, Scotiabank Economics.
15
Canadas Debt Service Burden Is At An All-Time
High
Distorted by accounting change
Source Bank of Canada, Statistics Canada,
Scotia Economics.
16
No Leverage Apart From Household Debt? Think
Again

• Condos have driven all of the rise in housing
  starts for years
• estimated 45-60 of Toronto of new condo sales
  over recent years have gone to investors not for
  primary occupancy.
• 5-15 down payments at sales office openings
  imply /- 10 times gearing
• then flip when the project goes live
• Leveraged equity has been behind this

17
Will Canadian Housing Starts Follow Sales Like
They Did In The US?
18
Scenarios For Housing Starts
19
Weakest Household Debt Growth Since The 1990s
Common/raffi/derek/Household Credit
Cannibalization - Back to 90's.xls
20
Especially For Consumer Loans
Common/raffi/derek/Household Credit
Cannibalization - Back to 90's.xls
21
Canadian Housingb. Mitigating Factors
22
After Ottawa Eased The Most Since 1954 NHA and
1967 Bank Act

• 1999 Introduction of 5 down payment insured
  mortgage
• 2003 Price ceiling on insured mortgages lifted
• 2005 Introduction of insured mortgage with
  30-year amortization period
• 2006 Introduction of insured mortgage with
  35-year 40-year amortization periods
• 2006 Introduction of 0 down payment insured
  mortgage

23
CDN Macroprudential Rules Clamped Down

• After sharply easing mortgage lending standards
  in 2006-07, the federal government has since
  reversed its position
• October 2008 Max 35 year amortization for
  insured mortgages minimum 5 down for insured
  mortgages consistent minimum credit score new
  loan doc standards for property value and incomes
• February 2010 Qualify at 5 yr posted rate
  instead of 3 yr lower refi ceiling to 90 from
  95 min 20 down required to get mortgage
  insurance on non-owner occupied properties
• January 2011 Max 30 year amortization for
  insured mortgages refi ceiling for primary
  occupancy homes dropped to 85 from 90 withdraw
  govt insurance on HELOCs
• November 2011 Accounting changes to hold more
  on balance sheet
• June 2012 Max 25 year amortization for insured
  mortgages insurance dropped for mortgages on
  homes valued over 1 million (ie now minimum 25
  down) refinancing ceiling dropped to 80 from
  85 mortgage payments and total debt payments
  capped at 39 and 44 of income respectively.
• 2012-13 Federal Budget OSFI oversight of CMHC
• Spring 2012 Insurance lifted from covered
  bonds, portfolio caps at the CMHC, new OSFI
  lending guidelines to banks
• January 2014 Basel III
• A key difficulty lies in evaluating the opaque
  forms of non-rules-based tightening being applied
  through moral suasion by regulators to lenders
  and GSEs.

24
Assessing Mortgage Rule Tightening
25
Good Reasons For Rising High-Rise Housing Demand?
Housing Starts
share of total

• Better affordability
• Favourable demographics
• Lifestyle choices
• More selection
• Urban renewal / intensification
• Tight rental vacancy rates
• Investor purchases

Single-detached
Apartment
Source CMHC, Scotia Economics.
26
Canadians Have More Home Equity More Real
Estate in their Portfolio
and More Real Estate Assets
Canadians Have More Home Equity
Real estate as of total household assets
Real estate equity as of real estate assets
Canada
Canada
US
US
Includes households, non-profits and
unincorporated business.Source U.S. Federal
Reserve, Statistics Canada, Scotiabank Economics.
27
Canadian Housing -c. Why Its (Somewhat)
Different From The U.S.
28
What Makes Canadas Mortgage Market Different?

• Explicit GSE guarantees unlike the US GSEs
• Strongly capitalized banks captive dealers,
  far less shadow banking
• Totally different funding model deposit
  funding large held-on-book component, versus
  reliance upon revolving door financing
• Financial institutions less reliant upon
  short-term lines
• No strategic defaults, outside of Alberta
  Saskatchewan (and limited there)
• Tougher bankruptcy rules
• Less outsourcing of sales force in Canada
• Generally more conservative products, but not
  entirely
• No option ARMs in Canada, but entire book
  resets within 5 years
• No mortgage interest deductibility (with
  exceptions)
• Stricter underwriting criteria including
  independent appraisals hair-cuts
• Canada has already taken steps to tighten
  mortgage rules
• and is pursuing further financial reforms
  (Basel III, OSFI oversight etc)

29
Canadians Usually Dont Default When House Prices
Correct
trough to peak in provincial mortgages in
arrears, bps
Canada has witnessed some big price corrections
since the late 1980s that corresponded with big
shifts in the macro environment, notably in
Toronto and Vancouver, and yet each time mortgage
arrears barely budged. Implication? Revenues are
at greater risk than charge-offs.
30
2. Canadian Housing d. Pockets Of Greater
Concern
31
Canadian Households More Heavily Leveraged Than
Most
32
Toronto Condo Investors Under Water
33
Torontos Luxury Condos Adding To The Overhang
Opening Date
January 2012
April 2011
August 2012
Summer 2012

• 25 storeys
• 101 residences

Residences at the Ritz-Carlton
Trump International Hotel Tower
Shangri-La Toronto
Four Seasons Private Residences (East West
Towers)

• 55 storeys
• 253 hotel rooms
• 103 residences

• 53 storeys
• 267 hotel suites
• 159 condo units

• 65 storeys
• 118 residential units
• 261 hotel rooms

• 66 storeys
• 202 hotel rooms
• 287 residential units

Source Andrew Barr/National Post,
THERESIDENCESTORONTO.COM, TRUMPTORONTO.CA,
SHANGRI-LATORONTO.COM, YORKVILLERESIDENCES.COM.
34
Contacts
Economics
  Derek Holt, Vice-President, Scotia
Economics derek.holt_at_scotiabank.com Dov Zigler,
Financial Markets Economist dov.zigler_at_scotiabank.
com      
35
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