Euro crisis could cross the ocean: Bank of Canada

[gse36]

its okay though b/c we have a sound banking system?

http://www.vancouversun.com/business/2035/Euro+crisis+could+cross+ocean+Bank+Canada/6787247/story.html

Canadian households be warned: Your finances could soon be hit with a big shock.

The spillover from an unbridled European financial crisis would carry over to this side of the ocean, first rocking the U.S banking sector and then ours. Already debt-burdened households would begin defaulting on their mortgages, banks would start tightening their lending, jobs would be lost and the hot housing market would go into the deep freeze, as fewer people would be able to buy. And, oh yes, interest rates would jump.

That's the bleak picture painted by the Bank of Canada on Thursday in its biannual Financial System Review.

Given all the uncertainty around the eurozone's worsening finances, this may not even be the worst-case scenario. "Conditions in the international financial system are fragile," the central bank said in the review. "If the sovereign debt crisis in Europe continues to intensify, it would further weaken global economic growth and prompt a general retrenchment from risk. In turn, the weaker global out-look would fuel sovereign fiscal strains and impair the credit quality of bank-loan portfolios."

Over the past six months, these growing concerns "reflect widespread doubts about the capacity and resolve of policy-makers to address unsustainable fiscal situations, the capital adequacy of some euro-area banks and the underlying balance-of-payments problems within the euro area," the review says.

The central bank warns that "if these issues are not dealt with in an orderly way, the contagion effects on global financial conditions could be significant."

In Canada, the high indebtedness of households and bloated house prices "require continued vigilance."

"These conditions make house-holds especially vulnerable to adverse shock," the bank said, adding that high household debt levels continue to be "the most important domestic risk to financial stability in Canada."

To be sure, some Canadian consumers have heeded calls for restraint from the likes of Finance Minister Jim Flaherty and Bank of Canada governor Mark Carney.

The central bank noted that house-holds have been piling on debt at a slower rate recently, with the ratio of debt-to-income basically unchanged from a peak of 150.6 per cent in the last quarter of 2011 - but that's still higher than households in the U.S. and the U.K.

Growth in borrowing - both for mortgage and non-mortgage purposes - has slowed from an annualized six per cent between May and October 2011 to four per cent from November 2011 to April 2012.

"Households need to be cognizant of the fact that borrowing rates will eventually normalize and ensure that they will be able to service new and existing debt over the duration of their loans."

The Bank of Canada went even further in its analysis, saying house-holds could be hit by two inter-related shocks - a big drop in house prices and a "sharp deterioration in labour market conditions."

"The initial decrease in house prices may be amplified by the links with the real sectors of the economy as lower confidence and lower household net worth lead to reduced household spending and employment. These interrelated factors would reduce economic activity and increase strains on household balance sheets."

The "elevated" supply of condominiums entering the market over the next few years "is particularly noteworthy," the bank said.

"Adjusted for population levels, multiples under construction in major metropolitan areas, especially Toronto, are above historical highs. If these units are not absorbed by demand as they are completed over the next 18 to 36 months, the demand-supply imbalance will become more pronounced."

Also under the bank's shock scenario, Canada's jobless rate would rise by three percentage points and lengthen the average period of unemployment by six weeks.

"When subjected to a persistent unemployment shock that reaches its peak in 2013, the proportion of household loans in arrears at domes-tic financial institutions is projected to rise to 1.3 per cent, compared with roughly 0.5 per cent in the fourth quarter of 2011.


Read more: http://www.vancouversun.com/business/20 ... z1xsg0XTqb

[semven]

Yup

[registered]

And the federal government's years of financial mismanagement will make the impact devastating. Gorging on MBSs sure beats prudence and planning.

[Taipan]

Eurozone near the abyss

But if europe breaks apart - that'll mean property prices will go up here, because were safe and our banks are good. eh?

[ArthurFonzarelli]

Suddenly the paid industry backers like Tsur and Helmut don't look so foolish - or rather - they have done a good job of hedging their bets: "real estate prices won't drop precipitously - no way whatsoever - totally unlikely they will drop - unless of course a major financial shock occurs, such as a sovereign debt crisis combined with financial system illiquidity and massive deleveraging... sort of like what we're seeing in Europe right now, for example, but no siree there won't be any drop in real estate prices - they will continue to inch upward or remain flat in this 'balanced' market... yup... unless that other totally unrelated and highly unlikely thingy occurs... then yeah of course we're all screwed." Then the papers run the headlines "real estate prices to stay robust: world renowned super experts"...

It's almost like these guys have PR training or something.

[Taipan]

Arthur these guys are really smart. They drive big expensive cars and they attend important meetings and work all this out, and they know, because they told us, everything will be Ok.

And like there was that lady in Toronto who was at all these meetings. Sherry Cooper I think her name was. and she sold her place for $4m. It must have been like a palace or something. Imagine that $4m for a house. Thats like 40x earnings for the average Vancouver household.

So she would know, that she needs to buy straight away and move up otherwise she will be priced out forever.

Thats what we all know dont we! Just buy buy buy, and it will keep going up!

I was talking to a taxi driver in Vancouver the other night and he was flipping condos and properties and everything.

I mean when taxi drivers are making money in property it must be a great time to buy. Its safe......right?

See here is a report here. And they even say what geezer said which is a stopped watch is right twice a day.

Once a year the editors of Toronto’s snooty Post magazines leave their luxe condos, drive their Mercedes to The Club and feign interest as a panel of egos discusses the housing market to come. Not that it matters. In their world everything goes up. But one must publish. Sigh.

For comic relief, I’ve been an annual guest, wandering along the rarified corridors, often mistaken as the fish delivery guy. And for the last couple of years I’ve told the likes of Toronto condo emperor Brad Lamb and BeeMo’s shrilly economist Sherry Cooper the market was unsustainable. They snorted, guffawed and gave piteous looks. I gazed off and thought fondly of turbot.

This year as the group assembled in splendour, I was in economy on the way to Halifax. Send me a question for Sherry, the publisher begged in an onboard email. So I did. “The average detached home in 416 now sells for 818,000,” I thumbed. “That’s 8 times average family income. Meanwhile household debt has exploded and incomes trail inflation. As an economist, having seen the US experience, are you not negligent not to be warning people about this bubble behaviour?”

Cooper responded that everyone was, in fact, being warned by the Bank of Canada, little F, CMHC, OFSI (the bank cop) plus her own bank. But, it’s different in Toronto (and Vancouver).


“So Garth is going to have to wait another year to be right?” asked one of the editors, with the correct amount of wry lip-wrinking and je-ne-sais-quoi insouciance.

“Well,” she hissed, “a stopped clock is right twice a day.”

WOW that could have been geezer if Geezer is a woman! Its such a smart and original thing to say. And they go on!

Four weeks later, Ms. Cooper awoke and time stood still. Astonishingly, this was shortly after she sold her four-million-dollar house, so close to The Club one could actually get there in limo shoes. The transformation from apologist to bear was a swift one. And, as with everything which matters deeply to her, she called in the media.

“Sherry Cooper was reminded of just how devastating the U.S. housing crisis has been for families and the overall economy in that country after speaking recently with a friend who is having trouble selling his house in New Jersey,” a Toronto Star story reports. “Ms. Cooper, the chief economist at Bank of Montreal, is starting to worry about Canada’s housing market after refuting the arguments of the extreme bears in the past.”

The story she told was of a friend whose $700,000 mortgage free-home outside New York is now worth $350,000, but unsalable because of a flood of competing homes on the market. The family is torn up after hubs got a job in a distant city – a fine example of what happens when housing sheds equity, and turns stone-cold illiquid. Which is clearly coming to a Canadian city near you.

“Now Ms. Cooper is looking at the debacle in the United States and the blistering pace of the market here and warning people to tread carefully,” the story shares. “I’m not forecasting a crash landing but it would be foolish to ignore the lessons learned south of the border,” adds mama grizzly.

What she sold. Whats that mean? Geezer? Semven? Why would she sell. And what was she warning us about. Is that why she sold?

Everything is going to be OK isnt it. My friend Keith whose losing $91,000 on his Condo and now unemployed will be alright, wont he? You guys told us it would be alright.

These people always have the average workers in the foremost of their minds when they make these big decisions, because they are supposed to help us.

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[ArthurFonzarelli]

Arthur these guys are really smart. They drive big expensive cars and they attend important meetings and work all this out, and they know, because they told us, everything will be Ok.

And like there was that lady in Toronto who was at all these meetings. Sherry Cooper I think her name was. and she sold her place for $4m. It must have been like a palace or something. Imagine that $4m for a house. Thats like 40x earnings for the average Vancouver household.

...These people always have the average workers in the foremost of their minds when they make these big decisions, because they are supposed to help us.

RANT WARNING

There was a good article in last week's Maclean's about how the retail/individual investor world is basically a rigged game meant to screw over the little guy, through disingenuous insiders who distort messaging, artificially pump up stocks, and make out like bandits while retail investors end up holding the purse and wondering why Facebook didn't triple in value like those nice stock promoters said it would. This was about the Facebook IPO but every single lesson is applicable to the RE bubble right now.

Makes me think back to a presentation I saw by CKNW's Michael Campbell in Feb 2009 at a conference, where he claimed that the GFC was not caused by any real problems in the economy or financial system - no excessive borrowing, no manipulation... was just an overblown lack of confidence that escalated out of control, with a few problems in financial system regulation. Minor stuff, easily and already fixed. Nothing to do with excessive leverage, blatant conflict of interest by the media pumpers and gov't backers and insiders, lack of savings, hollowing out of middle class... Meanwhile all the insiders and savvy investors bought all the way down in the crash and made out like bandits while mom and pop mutual funds were wiped out, cashing out their "safe" 60/40 funds at the bottom because they needed to save their few remaining dollars. And avg retirement age increased by 3.5 years by 2012. Such a shame. I've seen it 50 times or more.

And nobody learns a thing... it all just continues on the same as it did pre 2008, or worse.

Met a nice fellow today at an event who said he and wife make just over six figures (combined) and were just pre-approved for $1.2 mil. He said he knows they can't afford more than $400K at present rates. But nice lady at the bank said not to worry - rates aren't going up soon. Wonder where she heard that from, and what "soon" is in the context of a 30 year shackle. My friend sells mortgages at same bank. Nice gal. Earns $46,000 a year, dropped out of general arts in her 3rd year of undergrad, took a mandatory 5 day combined mortgage/financial advising course at the bank, rehashes one page flatsheet talking points to existing bank customers.

I work with a very nice gal whose combined family income is just over $200K per year. They own a 2 bdrm condo in East Van and can't afford a SFH but desperately want one because of growing family. Actually that's not true - they could buy a SFH but don't want to, because, in her words, it would be a dump and they'd be elbow-deep in mousesh!t and stucco for 3 years, and they actually want to buy vegetables and contribute to an RESP for their kid but couldn't afford to with an $800K mortgage. Should have seen her eyes when I told her she is the 1% - she figured you needed at least $500K per year. Nope... $230K. What's 35% of that? After tax: $3,500 per month. With rates up 200 bps in 3-4 years... that's probably getting you a $500K mortgage or a bit better by my math. Yeah, that's a healthy market... the 1% can only buy half of the "average" house without a hefty DP.

This is what sickens me and drives me to post my useless rants on these boards - not (just) that I want to buy a reasonably priced SFH in the LM. I'm not some bitter lefty renter - I'm a fiscal conservative to the core, and own property outside the LM. I just can't stand to see the lies and deceit that will harm so many people while the insiders make out like bandits once again.

And Taipan - I had season's passes at "Tod Mountain" (Sun Peaks) my entire childhood. Awesome mountain, fresh cold powder Nov-Apr every year, and never more than a 5 minute lineup even on Boxing day. OK maybe 10 minutes on Boxing Day. Sounds like you made a good purchase for you. Even if it goes down in value some, I know how soft the market is there and think you did get a pretty good deal at ~2005 pricing. Good on ya, mate!

And I guess I'm just some crazy, delusional nut-job just like you... which in this warped world I will wear like a badge of pride.

END RANT

[thirdlittlepig]

THe Bank of Canada has cried wolf once again. The message is not really any different now than before, but people have now become deaf. I mean look around, we are doing well while the rest of the world goes to hell in a hand cart because we are special, we are Canadians!Bad Things never happen to Canadians. and we have our fearless Econonomist leader who has immunised our banking system against the bad old world. What can go wrong? We have oil. Okay the price of oil is now predicted to drop precipitously, but so what. We have Real Estate and that only goes up. So there. Our system works perfectly, ignore the growing lines of unemployed, keep the rich happy, screw the "middle class" (who are living on borrowed time litereally), and stop with the doomsday stuff, you'll scare people. Then we're gonna have a problem.

[tdma800]

I work with a very nice gal whose combined family income is just over $200K per year. They own a 2 bdrm condo in East Van and can't afford a SFH but desperately want one because of growing family.

She's not very smart.

Umm. I don't think a 7 year old home would be full of mice/mildew or anything like that.
4908 MANOR ST, Collingwood, Vancouver East, $878,800.00

[Taipan]

I work with a very nice gal whose combined family income is just over $200K per year. They own a 2 bdrm condo in East Van and can't afford a SFH but desperately want one because of growing family.

She's not very smart.

Umm. I don't think a 7 year old home would be full of mice/mildew or anything like that.
4908 MANOR ST, Collingwood, Vancouver East, $878,800.00

Mr tdma800. Thats not nice. Taipan did not write that at all!