Today, the Bank of Canada signaled that it will soon start increasing interest rates.
The Bank of Canada is sending a clear message that interest rates could rise as early as
June, signalling a turning point in the recovery and triggering a debate
on how fast and how high rates will move.
The central bank kept its key rate steady at the rock-bottom level of
0.25 per cent at its policy meeting Tuesday, but removed key language
that had pledged to keep the benchmark at current levels through the
middle of the year.
That move contributed to growing expectations that the central bank will
raise rates as early as June 1, its next policy decision, and sent the
dollar soaring again.
Yet, Canadians have been piling on the debt.
Canadian borrowers are fast
approaching a day of reckoning.
Lured by cheap money to buy up, buy in, expand and make over, families
have pushed credit levels to a record high.
Now, mortgage rates are beginning to creep up and the Bank of Canada is
poised to retreat from the record-low interest rates it adopted to fight the recession and spur recovery.
The end of the free-money era has left consumers more vulnerable than
ever, and those who threw caution to the wind could soon face costs they
can't handle.
Household debt has surged three time faster than income in recent years
and now stands at a record high of more than $1-trillion. Put another
way, Canadians owe about $1.47 for every dollar of disposable income.
Even more remarkably, they took on more debt during the slump – a first
for a recession – because borrowing was so cheap.
With debt levels this high, even a small hike in interest rates will be
ugly for those whose incomes aren't rising fast enough to meet their
day-to-day expenses.
Their woes could have a snowball effect: As debt-strapped consumers pull
back, their credit woes spill over into the broader economy and risk
putting a damper on the recovery. ...
Most of the increased debt, roughly 70 per cent, has been in mortgages,
reflecting the still hot housing market in much of the country. That has
left many households struggling to meet monthly payments on hefty
mortgages and more susceptible to rising rates. Families in Vancouver,
for example, spend about 68 per cent of their disposable income on the
cost of maintaining their house, compared to less than 40 per cent 10
years ago.
“There's been a real frenzy just to get in [to a house] at all cost,
because if you don't get in you may never get in,” said Scott Hanah
chief executive of the Credit Counselling Society, a non-profit group
based in Vancouver that helps people sort out their debts. ...
Canadians used to be big savers and cautious borrowers. In 1982,
Canadians socked away 20 per cent of their disposable income and per
capita debt stood at about $5,500, according to Statistics Canada. By
contrast, Americans were saving just 7.5 per cent of their disposable
income at that time and borrowed $6,500 per capita.
Savings and borrowing soon went in opposite directions in both countries
and by 2002 debt levels surpassed disposable income for the first time.
In 2005, the savings rate in Canada fell to 1.2 per cent, about the
same as in the U.S. Meanwhile, per capital borrowing jumped to $28,390
in Canada and $48,700 in the U.S.
Consumers are feeling the pinch. A survey last year by the Certified
General Accountants Association of Canada showed 21 per cent of
respondents could barely meet the interest payments on their loans. The
group is about to release a similar survey this year and, said the
group's chief executive Anthony Ariganello, the level of those
struggling to cope has climbed to about 23 per cent. ...
In a recent report, Mr. Tal concluded that “Canadian consumer
fundamentals are weaker than they have been in almost 15 years.” ...
We commented about the Canadian Housing Bubble not too long ago. Canadian mortgage rates are at multi-generational lows. Even a small rise in mortgage rates will hurt Canadians' pocketbooks.
Housing bubble. Rising debt levels. Sound familiar? The end game is also likely to be familiar.
Canada has been good, but Canada has also been lucky. Easy money arising from the Fed's zero interest rate policy has flowed into Canada, arresting the collapse of the Canadian housing market before it really started to accelerate, sending home prices north of the border to record highs. When money begins to tighten, Canada could become extremely vulnerable.
What could save Canada? The Fed's zero interest rate campaign to debase the dollar helps real assets, particularly commodity prices, which benefits Canada. If the Fed's policies remain extremely easy, then Canada's inevitable housing collapse may be buffeted by relatively high commodity prices.
Long term Running of the Bulls readers may think I'm talking my book, as two months ago I stated that I was short Canada. A few weeks ago, I covered all my shorts and am now long Canada and risk assets in general (ensuring that a correction is imminent - ed.). Generally, asset markets collapse when monetary policy is tight. Monetary policy is currently very easy. Usually, asset prices rise for some time after the first increase in rates by the central bank. I have been looking for a 5%-10% correction for some time, and that may happen. However, I expect stocks to be higher in the future. But at some point, you are going to want to be far, far away from Canadian (and global) stocks.
