Certainly not the end of the world, but Canada is moving into a natural period of correction for some of the commodity-fueled over-exuberance cast its way over the past 5 years. With GDP year-to-date cooling so far to a 1.6% annualized rate, the second half of the year is looking weaker still.
This morning we learned that March retail sales were flat as Canadian consumers feel the weight of record debt levels (now 167% of disposable income) and weakening home prices (in hot spots like Vancouver prices are so far down about 12% and counting). Nationally, Canadian real estate is approximately 30% over-valued on conventional metrics. Considering that most people buy homes with mortgages and relatively modest down-payments, a price correction anywhere in the 5-30% range can effectively erode all of the owner’s net equity and then some. The average Canadian home price is $380,000 in 2013, and the average buyer has anywhere from 5 to 20% as a down-payment. Even if mortgage rates stay near current record lows for the next couple of years, stagnate and falling home prices remove the ability of consumers to refinance in order to consolidate other debts or support extra spending. Last July, the government wisely mandated a reduction in the maximum that Canadians could refinance on their home equity lines of credit from 80% to 65%. This will help to guide Canadians back to more healthy spending and borrowing habits, but in the meantime, it has placed a natural curb on consumer spending for the masses.
With commodity prices moving lower with the global economy, and the domestic economy paying penance for past over-spending, Canada is firmly in pay-back mode. The Bank Credit Analyst released a report this week entitled, Canada: on the road to recession (subscribers only).
The Canadian dollar seems to agree, selling off about 1% today and now down over 8% since 2011. In the longer run of course, a weaker dollar is exactly the kind of support Canada’s export sector needs. In the broader picture shown below, the Loonie is today breaking company with the “QE-will-boost-demand” hopes of the past couple of years. As they say in rehab, it is healthy to let go of false beliefs that do not serve us. So this trend breach back to reality is actually progress.
Chart source: Cory Venable, CMT, Venable Park Investment Counsel Inc.