Juggling Dynamite

With the Canadian unemployment rate still under 6%, credit appetite has slumped. Canadian household credit growth in real terms is flat for the first time on record. This negatively impacts the outlook for economic demand, lenders and the highly leveraged realty market.

In their quarterly earnings reports this week, Canadian banks are increasing loan loss provisions and warning that the trend will continue as unemployment rises; see Scotiabank and BMO brace for higher impaired loans as interest rates weigh on consumers.

In the quarter, Scotiabank set aside $962-million in provisions and BMO reserved $627-million – more than the banks booked in the same quarter last year and higher than analysts had expected. The bulk of those provisions were put toward impaired loans, or debt that a bank believes will not be repaid.

Nick Gerli (video below) reports real-time and historical US real estate data. Canada’s trends and numbers are similar and worse in critical metrics like home affordability, household indebtedness, economic strength and unemployment. Rising defaults lead to foreclosures, empty properties, higher supply and lower prices.

Everything is the rate of change at the margin. A relatively small percentage of defaults is often enough to trigger significant price declines. This cycle is happening now in many areas. Look around you…

The foreclosure rate in America’s Housing Market is still at a fairly low level overall – about 0.2% of all houses. But it has now started to rise due to elevated debt-to-income ratios for existing homeowners. Many are struggling to pay their bills and going into default on credit cards, auto loans, and now mortgages. In the last Housing Crash from 2008-12, the foreclosure rate in America peaked at 2.0% of all housing units. And in some markets, the foreclosure rate hit over 10% of all mortgages (like Miami and Las Vegas). It’s unlikely the mortgage defaults in the housing market get that bad again. However, the concern for home prices and existing homeowners is that even a small uptick in foreclosures from current levels could cause significant downward price action, particularly in areas that have low inventory. Here is a direct video link.

Thirteen years of ultra-easy money (2009-2022) drove an epic malinvestment of resources on a global scale. Now, we are grappling with the weight of those choices. From here, there’s a lot of room to make wiser investments that will increase efficiency and free cash flow while reducing waste, especially around energy, housing, transportation and food.

China’s property crisis is expected to worsen as new home sales plummet and indebted developers struggle to find funds to complete projects. WSJ’s Jonathan Cheng traveled to an abandoned ‘ghost town’ to see the challenge China’s real estate slump poses for the government. Photo: Antoine Morel for The Wall Street Journal. Here is a direct video link.

See more in China’s home prices slide, increasing pressure on Bejiing:

For decades, the property sector had been a major driver of China’s economic growth. Real estate and related sectors such as construction represented around a quarter of China’s gross domestic product in recent years, according to widely cited estimates by Kenneth Rogoff of Harvard University and Yuanchen Yang of the International Monetary Fund.

That has made it an open question how far the pain of the real estate slowdown will spread.

Hybrid work has put office building owners in a bind and could pose a risk to banks. Landlords are now confronting the fact that some of their office buildings have become obsolete, if not worthless. Here is a direct video link.

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