There’s a warning bell coming out of the USA that echo’s a potential similar problem facing Canadians. Canadians are the highest debt per capita in the developed world. Our debt/GDP is skyrocketing. This easily makes Canada just as vulnerable, if not more so, to the problems seen in consumer debt in the USA.
USA’s consumer credit availability challenge
“The rejection rate for auto loans increased to 14.2 percent from 9.1 percent in February, a new series high. It increased for credit cards, credit card limit increase requests, mortgages, and mortgage refinance applications to 21.5 percent, 30.7 percent, 13.2 percent, and 20.8 percent, respectively. The proportion of respondents reporting that they are likely to apply for one or more types of credit over the next twelve months rose to 26.4 percent from 26.1 percent in February. The average reported probability that a loan application will be rejected increased sharply for all loan types. It rose to 30.7 percent for auto loans, 32.8 percent for credit cards, 42.4 percent for credit limit increase requests, 46.1 percent for mortgages, and 29.6 percent for mortgage refinance applications. The readings for auto loans, mortgages, and credit card limit increase requests are all new series highs.” — Center for Microeconomic Data, Federal Reserve Bank of New York
Question: When will Canadians be similarly cut off as our US counterparts? What will that do to our economy? More on that potential below…
Canada’s household debt highest in developed nations – BBC report
“Household debt in Canada is now the highest of any G7 country, according to data by the country’s housing agency. The amount owed by Canadian households is also higher than the country’s entire GDP. The Canada Mortgage and Housing Corporation said high home prices are to blame for the ballooning debt.” BBC News, Toronto
Canada vs. USA
My concerns with real estate sensitive stocks are that Canada may end up facing a much, much worse problem than the USA – because of real estate problems as noted in the BBC report above. Note how CDN real estate prices began to rise during the 2008 real estate rush, then began getting parabolic after 2016, when the new government came in. Note the contrast during the same period in the USA, below. COVID was not the reason for this parabolic spike in Canada, as the comparable illustrates.
Yes, it was avoidable
Not to get too deep into Canadian politics (although regular readers do know I dab in the subject on occasion)….
About three years ago, when the Liberal government and the Bank of Canada were claiming that ‘deflation’ was the real threat, Pierre Poilievre was delivering speeches in the House of Commons where he went into great detail on the impending consequences from massive federal spending, massive deficits, and massive money printing by the Bank of Canada. Poilievre repeatedly explained that without a substantial increase in the supply of goods, an increase in the supply of money would lead to inflation – particularly of fixed assets like housing!!!!!!
At the time, the Liberals accused Poilievre of ‘fearmongering’ and ‘talking down Canada’s economy.’ Their words. Turns out, he was exactly right about what was going to happen. They (PM’s office) obviously can’t admit this, nor can they take responsibility for what has happened to the housing market during their time in power. So, all they have left is to try and somehow blame Poilievre for it. Um, OK. Hence some nonsensical tweets by Housing Minister Ahmed Hussen. Like saying they are doing something productive to fight inflation while the opposition fights these wonderful spendy ideas. Like printing and spreading more around to help fight inflation. Um, yeah….Precisely what they did to get us IN this situation. Putting out the fire by adding more wood. Tiff Mcklem (BOC Governor) has been battling this reality as he raises rates against an ever growing money printing agenda. I feel sorry for the guy.
I bring this political stuff up because, at the same time that the PM’s office was being warned about the potential for inflation by the opposition (which of course, was an accurate warning that was ignored), I was writing numerous blogs on the exact same potential. At the time, I was doing my own historical research on CPI patterns and causation (you may recall my recounting of the Fed’s Keynesian economic policy/ aka print and spend, of the 1970’s – amongst other lessons learned in that era). I reached the same conclusions as Poilievre and blogged on the subject. Such as here, here, and here. Unfortunately, Canada has a Finance Minister and Prime Minster with Liberal Arts backgrounds (strange as it may be), and appear unfamiliar with basic economics.
Avoiding stocks negatively impacted
Some people get bent out of shape when I point out the consequences of these government policies, but clearly I don’t care about hurt feelings surrounding facts. Trudeaus remain fans are free to unsubscribe to the blog if so bothered by these realities. If you are still with me at this point, I’d like to examine a few sectors that might be best avoided as Canada struggles with its government and consumer debt, along with inflated housing prices.
Banks are notoriously tied to Canadian real estate sales / mortgages – along with credit debt and auto loans. Craig and I have been trading one bank for a quick oversold bounce. We expect to sell it soon. I noted that bank play on BNN recently (TD, for those interested). But note that I am net-net uninterested in buying Canadian banks for anything more than a near termed flip. Note the sideways pattern below. Tradable, not investable at this point.
It may be interesting to note a contrast in business models. It is clear that some of the more “sub prime” mortgage lenders like MCAN look much better than the prime lenders (banks). This, given that distressed Canadian consumers are turning more towards these lenders – MCAN focuses on family homes rather than commercial, etc.
The TSX REIT ETF shows us a similar pattern to that of Canadian banks, albeit more volatility within that sideways containment. Big enough swings for a trade, but nowhere near a long termed investors dream at this point. Given the above discussion, what could inspire a breakout through $18 resistance on this chart?
Colliers isn’t a Canadian real estate pure play, given their Int’l exposure. Still, the trend shows us that its not a place for investors to be looking.
Canadian construction is under pressure via both an overbought, overpriced real estate market caused by government inflationary policies…AND red tape. My son, who is in the home construction business, notes that Poilievre is correct in comments since 2020 regarding ” government gatekeepers”. Canada is ranked as the second worst county in the world regarding how hard it is for developers to build right now. This pushes prices higher as mass immigration continues to add to demand.
For example, MRD is involved in Canadian housing developments (subdivisions, large projects). Note the go-nowhere performance, despite strong need and demand for housing in the past two years. If you let them build it, they will come (paraphrasing Field of Dreams). Unfortunately, they cannot build it, yet they still come….
Canada faces some unique challenges of inflationary pressures and policies. We continue to focus on climate virtue signaling while paying little attention to our consumer and government debt, along with a world-leading housing crises. For example: A knowledgeable client of mine notes that “Whether you know it or not, you and I are on the hook for about $2000 each — that’s $4000 per couple — to finance 2 big Lithium-Ion Battery plants for electric cars: one for Volkswagen in St Thomas, the other for Stellantis (a S. Korean firm) in Windsor.”
If sent an invoice by JT for the $2000, would you be happy to pay it? You are, one way or another…
BTW–In 2020 I proposed we receive a new tax assessment outlining your exact costs of all of these spendy projects. It is my opinion even the financially unaware JT voters would have something to say when they saw how it impacted their personal finances.
So – This $26 billion of new debt created by Ottawa and Ontario adds to inflation, thus aggravates our immediate problems in paying the grocery bill or providing housing for our growing population. And it impacts our stock holdings. So you need to be aware of the situation for many reasons, including as an investor. Unless the Canadian government begin to grasp economic reality, I’d stay away from stock sectors affected by the current pathways we have been forced to follow.