Canada

The BIS Just Flagged Canada For A Financial Crisis Because of Real Estate and Debt

The BIS Just Flagged Canada For A Financial Crisis Because of Real Estate and Debt

Canadian real estate prices have helped push Canada into a warning for a financial crisis. The Bank of International Settlements (BIS) published their quarterly review of central banks. The review is an exhaustive assessment of banking indicators, looking for any signs that could lead to stress at domestic banks. Canada is now flashing a warning signal for all four categories, which would typically lead to a financial crisis.

The Bank of International Settle-What?

The BIS is known as the bank for central banks. The Swiss-based organization does research and advisory for the 60 central banks that fund and own it. The goal is to make sure that monetary policy is more “predictable” and “transparent.” It’s a club, where central bankers can meet, without the prying eyes of their local governments. You know, so they can get advice from each other, that may not be all that helpful for regular people.

The BIS is one of the few organizations that flagged the US for a banking crisis. Despite knowing what was coming in the mid-2000s, the Great Recession still hit in 2008. Knowing something doesn’t mean you can do something about it. Although some of the world’s largest fund managers appreciate the warnings.

Credit-to-GDP Gaps, Debt Service Ratios, and Property Gaps

The most useful thing the BIS produces is the Early Warning Indicators (EWI). The EWI are a set of binary indicators, that look for rapid changes that can cause stress to the banking system. Binary indicator means they either warn or don’t, there’s no estimate of how serious the crisis will be. The Credit-to-GDP gap, debt service ratio, and the property gaps are the big EWIs you’ll want to know.

These are elaborate calculations, but they’re pretty simple concepts. The Credit-to-GDP gap is the speed of credit changing, in contrast to GDP (we actually touched on a similar observation on Friday). The debt service ratio (DSR) is the level of debt servicing, which are the payments required to maintain credit in good standing. The property price gap is how quickly home prices jump. I know, your real estate agent says quick moving property prices are a good thing. The BIS thinks it leads to banking instability.

Canada Is Flashing Three Warning Signs

The BIS quarterly, 196 page report notes that “Canada, China, and Hong Kong SAR stand out.” They can’t tell us when a financial crisis is going to happen. However, they do assign red or amber warning indicators. Either warning, has been indicative of a financial crisis, two-thirds of the time. Canada is the only country flashing warning indicators for all four categories.

The BIS Just Flagged Canada For A Financial Crisis Because of Real Estate and Debt - EWI Chart
Source: BIS.

The BIS notes special attention to credit-to-GDP warnings, when combined with a home price gap. Canada has the third highest credit-to-GDP gap, of countries that also have a home price gap. Only Hong Kong SAR, and Switzerland rank higher. Once again, a higher number doesn’t mean the correction will be more severe. It means the likelihood of the issue resolving itself is more slim.

Canadian real estate debt has been the primary driver of three of the four EWIs. This warning follows the US Federal Reserve calling Canadian real estate buyers “exuberant,” UBS ranking Toronto as the largest bubble in the world, and IMF expressing concerns to senate. It’s probably nothing.

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Photo: Fred Romero.

52 Comments

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  • Realtard Pro™ 6 months ago

    But my Realtor said the only people that are against the housing market in Toronto are just jealous? 🙄

  • Yu 6 months ago

    I hate to be “that” person, but a financial crisis doesn’t necessarily mean that real estate prices will correct. The country is very large, and not all one market. A correction in Hamilton is not a correction in Vancouver.

    • C 6 months ago

      Its a banking financial crisis, caused by a credit bubble in housing and crookekd foreigners taking out subprime mortgages backed by canadians.

      Which means if this goes sour, our entire country is fucked…Including your BC real estate.

      • bluetheimpala 6 months ago

        Subprime? Lol..ok there, I’ll leave that one alone. We can’t just blame the foreigners, we did it to ourselves with cheap money and almost no transparency which has been a historic problem that was finally exploited when everyone was making money and felt like superman after smoking a pound of crack…I know Canadians who own multiple properties and up until a month ago thought, and many still think, they are impervious to the looming crisis. They will just ‘rent them out’…but the underlying mortgage is going to rollover in 6-12 months and no more 1.95% rates, assuming we get the April hike, some people are easily going to be in the high 3% (5yr Fixed) with a stress in the 5%…they will be stuck with their current provider and still see their carrying costs almost double. see if they can rent their shitty condo for $4000 a month to cover the cost and try to keep the other afloat. They cannot break the lease on their places (renter protection is insane now) so will have to carry the neg until their current tenants leave.
        Even 2008 took 12-18 months to play out…tick tock. Tick tock.

        • Joe 6 months ago

          US Housing Market Timeline:
          2006 Q2 – Housing prices climb to all time highs in AZ, NV, FL, etc.
          2006 Q4 – Subprime cracks start to appear
          2007 – With interest rates high, stock market racing higher; mortgage backed securities fail as subprime problems spreads
          2008 Q1 – US in full blown mortgage crisis, Global Financial Crisis underway

          Time from peak to crisis: 6-7 Quarters

          Price peaked in 2017 Q2 for many Toronto properties.

          History does not repeat itself, but it sure rhymes.

    • bluetheimpala 6 months ago

      Really? I leave for a week and evidently someone let the door wiiide open…shit boys and gals! I have a new mantra in life “Stop giving an F about stupidity and stupid people’…the economic driver of Canada is…wait for it…Moose Jaw, Sask! No stupid, it is Ontario and specifically the GTA. Then a mix of BC and QC (aka federally subsidized waste land of cheese and asbestos topped off with xenophobia and bigotry). Besides QC which never got hit by the rapid asset appreciation in housing/land/commerical because (see above), BC and ON are going to bleed for 12-24 months unless the BoC chops rate and then we’re fucked anyway. So pick your poison.
      Seriously, when I go away, do I need to assign someone to smash Yu guys (see what I did) to the ground.

    • Dana 6 months ago

      Yu, the Canadian financial crises are routed in Real Estate and … the most important… this is a domino effect; every aspect of Canadian economy will be effected and every area of this country will be effected.
      1. If I rent one bedroom in Hamilton today and tomorrow I see a listing for two bedroom next door at the same price, I will vacate my current unit and move to the two bedroom unit.
      2. If I move to Hamilton today from Toronto, cos I could not handle Toronto shelter payment, and I see that now Toronto’s shelter is cheaper, I definitely move back to Toronto and vacate my unit in Hamilton.

      Both examples above are very simplistic and assumed that I still have a job; note, economy does not work in segments; all is connected including Canadian banks who will get hit (a lot of jobs in Toronto are in a banking system)

      The real estate slowdown will add to the job loss, which will add to less spending, which will pull small business profits down, which will then effect everybody down the line. This is how the economy works. The immigrants who no longer can hold the jobs, probably will move out from Canada, the rest will go on unemployment … etc… The key factor to watch is the jobless claims in the next three months.

    • Richard Leblanc 5 months ago

      I think the point is there shouldn’t be a need to discuss a crisis to begin with. When you pan for gold and make a 1000.00 but your expenses are 1200.00 there is something wrong with your business model. Our parents understood this but now basic financial planning seems to be something of a mystery even for those who collect our taxes. Must be all the Central bank jargon. All those fancy charts and talk of instruments will make any ones head spin. Snake oil sales men used the same technique. If you can’t dazzle them with your brilliance baffle them with your …………..

  • Trader Jim 6 months ago

    Interesting, I wonder how this contrasts to Goldman’s numbers. They were at 30% chance of a financial crisis when prices were rising, the BIS is at 66%+ now.

    I’m really not sure if Canadians will “feel it.” We’re mostly naive to these circumstances. Around 2010, consumer spending and travel fell off of a cliff in Canada. People pretended there was no impact on their life, but you can’t remove that much spending without there being fall out.

    Poor measurement standards don’t capture these issues. StatsCan’s 55,000 person employment survey is used to determine the level of employment for 36 million people. How accurate do we think that is, when they’re looking for 6% of people that aren’t employed?

    • Joe 6 months ago

      You gotta take Goldman with a grain of salt at times, or at least be suspicious. They produce some excellent research, as do most investment banking syndicates do. But Goldman also has a history of screwing over some of their own clients by selling shitty securities they knew would fail. Understand that GS probably produces two sets of analysis: external for the masses, and internal for partners and key clients. The external research will typically be “optimistic leaning” and “lighter” than internal, with a focus on pushing some kind of message or agenda on behalf of an organization, agency, or sovereign government.

    • bluetheimpala 6 months ago

      Look at what GS says historically, where they put their money, what ends up happening and SHOCKER how they tend to end up profiting…same with hedgefunds…more than a grain of salt, an entire salt-lick…they tend to say one thing, do the other and ‘surprise shareholders’…funny how those bankers always seem to make $$$

  • bobjames 6 months ago

    It is very sensitive to save the real estate. Specially on that case when the agent is on pressure.

    • bluetheimpala 6 months ago

      Holy crap…is this a foreign troll? Love it! Unless you had a stoke Bob, I assume this is a bad ‘Google translate’ from russian or chinese…whatever, please keep them coming. A little pee came out I laughed so hard…time to change my undies.

      • Grizzly Gus 6 months ago

        Bobjames sounds like a pretty Canadian name to me!

        • bluetheimpala 6 months ago

          Wow Grizzly…wow…seen you around this block and had much higher expectations. What is your personal email? I know a Canadian Diplomat, Bill Johnson, who needs a small wire of funds to get out of a ‘international dispute which he cannot divulge in Nigeria’…you definitely seem like a kind soul who would be more than happy to assist. Let me know. Bill needs your help!

          • Grizzly Gus 6 months ago

            LOL. Easy there Blue, I was agreeing with you there! Don’t worry, we haven’t all lost our mind since you’ve been gone the last week.

            Found it hilarious that the troll or scam artist just merged two english sounding names together to try and fit in……….. Shows how much effort has to go into fooling people nowadays.

          • Bluetheimpala 6 months ago

            sorry Grizz….was reading up on last week’s posts and saw the partisan garbage, xenophobia and outright subversive shit and lost sight of the good guys…my bad. Forgiven?

      • Joe 6 months ago

        Note: If you look at the author’s name at the top of the comment, and it has a slightly different looking font…. it’s a clickable link. “BobJames” is clickable to a development company in Pakistan.

  • Widening Gyre 6 months ago

    Ha! good catch Joe! Looking for my Dream Home in Bahria Town right now! I’ll let you know when I find it 😉

  • Maria 6 months ago

    Consider CAD value variable: right now, Vancouver house is listed at CAD 6,680,000. If you re-currency it to US at 0.82, it comes as US$ 5,477,600. But if Canadian dollar should fall to not so long ago 0.67, then you are looking at a much better deal at US$ 4,475,600. I difference of over 1 million US dollars. What I get at is-should financial crisis strike Canada, then CAD value will go down, making Canadian real estate a still profitable investment.

    • Functioning Brain 6 months ago

      Maria, here is the issue love, investors don’t want to put their USD into a house that is loosing $1m usd errry couple of years, cause that is a bad investment.

      Is it September yet?

      • Joe 6 months ago

        I am with you on a crash coming Brain, just wish I knew where you got Sept from?

        • Functioning Brain 6 months ago

          Joe I don’t think Sept is bottom I think Sept is when we are going to feel the first real initial painful BOOM (IMHO we haven’t seen SHIT YET)

          All the pre-qualified mortgages from before the stress test won’t be flushed out of the system till the end of April, some banks are extending them an extra 90s days (end of July)!

          By September there should be at least one more interest rate hike…summer buying is done kids going back to school (families aint shopping for shit) and moving into the fall starting to look towards winter with a few more hikes likely coming…

          Hence September, that is when there should be no more pre-approved minus stress test mortgages at December 2017 rates, when will have just had a record low summer, when rates have risen again and are poised to rise again and again, and when we start remembering winter is like 8 months around here!

          Then I expect it to keep spiraling down to real bottom until like 2022-2025 when the government will pull some dumb ass stunt like 0 down payments, 40 year mortgage, 20% grant to first time home buyers, 2.5% interest rates and it will slowly over the course of the 15 years following that bubble right back up.

          Wash, rinse, repeat!

        • Functioning Brain 6 months ago

          Sidenote, Joe I think Toronto and Van will go down no less than 30% from prices TODAY 50% would not surprise me but seems a bit of a stretch but also doesn’t if you really think about affordability and our actual economies, and frankly if it flops 70% I won’t be in disbelief I will just mutter under my breath *interesting worse than I thought*

          • Joe 6 months ago

            Brain, thanks for the explanation. I agree.

            I was in San Fran in 2008-09, and remember talking to some people who picked up homes an hour outside of city that were only 5 years old, built for $750k, and snatched up at $350k. So the idea of a 50% decline does not shock me. I have been pegging a 20% to 50% decline in Toronto housing prices, with condos taking the brunt of the declines. The only reasons why condo prices are still rising, are due to the one of the few remaining RE properties people can qualify for due to cost, and the over all push by developers on any and all investors.

            I really think by first half of 2019, Toronto housing will be crisis mode.

          • Joe 6 months ago

            Brain,

            Make sure to factor this shit show into your equation as well:

            https://realestatewealthexpo.com/toronto

            I can’t believe people go for these things.

        • Functioning Brain 6 months ago

          I agree! I think September is going to be when the first major domino falls! This is not going to be fast, it will be LONG, drawn-out and painful!

          • Grizzly Gus 6 months ago

            I think you’re right about September being the time when the general consensus will switch “Uh ohhhhhh”.

            This spring will look really ugly but I bet the RE industry will be spin it off as the have been “We’re comparing it to record numbers! This is to be expected! We expect to see growth again this fall”

            There might be an illusion in the late spring/early summer that looks like we are trending up again……. Huge influx of listings in May/ June 2017, sales also dropped big time. Therefore, new listings might look they are trending down or static and total sales trending up or static RE industry will jump all over this to say we have found bottom (Will be happy to reference last years numbers again).

          • Grizzly Gus 6 months ago

            I think by August/September the YOY numbers will start to drop from 2017 again, and that’s when the free fall will start. Recession talk might also be popping up in the media at that time

          • Functioning Brain 6 months ago

            Yup! Grizz I think we are the exact same page!

            September!

    • Alistair McLaughlin 6 months ago

      Um, no, it works the opposite. Currency risks tend to scare investors off rather than attract them. I did not see an in-rush of foreign investment into Mexico after the peso devaluation in 1995, nor did I see foreign capital charge back into Thailand after the baht got slammed in 1997-98. It took years to return.

      Currency volatility makes investors very antsy. If you bought when the CAD was at $0.82, and hung onto the house until it was $0.67, you lost a metric shit-tonne of money – over $1 million USD as you say. That doesn’t exactly encourage the next guy to buy that house at $0.67. Because he’s thinking “What if the CAD falls to $0.61?” A falling currency makes things cheaper vis a vis another currency. Cheaper does not always translate into better investment in the eyes of a foreign speculator.

      Nice try though.

      • Maria 6 months ago

        Alistar: all correct, only I meant the opposite – it’s low Canadian dollar, which was the result of the slid in oil prices, that made Vancouver houses not so “expensive” to US dollar buyers in the last couple of years. When “they” (not me) bought at low$ they now can sell at a higher $ and possibly do it again with a longer time horizon in mind. By “they”, I mean not Americans, but everyone who keeps money in US dollars. With Vancouver prices at 2,5 mil for a knock down home, currency variable deserves a consideration. My biggest question is – will Canada still boast AAA?

        • Grizzly Gus 6 months ago

          Maria, a Canadian “investor” could purchase today for a 100-200k discount based on prices from last year………… Could be good for new “investor” if prices stabilize or begin to take off again. Why are they not all rushing in right now? Because they want to see how much further prices could fall/ don’t want to catch the falling knife. Not great for current investor because they have lost 100-200k on their investment.

          For the foreign “investor”. They could get a discount based on the weaker dollar on top of that 100-200k price drop. Could be good for new “investor” if dollar starts to go back up or if prices stabilize or take off again………. Bad for current investors because they would get less converting money back to another currency on top of the 100-200k price drop……… as Blue would say “Double Dicked”……………. So will the foreign investor worry about seeing how far our dollar drops or housing prices fall before jumping in? Will they want to catch the falling knife?

  • Maria 6 months ago

    Sure, I agree with your point on bad investment. However, how low will CAD fall? And for how long?? It is quite tricky when you think about it – because Can dollar is pegged to oil prices, which are coming back after a shocking slide, pulling CAD up, up, up (Feb. we had it for 0.82). But if Canada gets “flagged” for real, then what happens to CAD value??? What are your thoughts:)

    • Functioning Brain 6 months ago

      Maria I hashed them out above.

      No one wants to invest in a sinking ship, it aint a sexy gamble.

      There are lots of places all over the world where Americans can by property for pennies to their dollar (warm places, tropical places, places with no taxes or little taxes)

      Speculators are here to make money not to sit in a frozen tundra for 25 years losing money waiting for the cycle to repeat, their are way easier ways for them to grow value than that!

      For the past 10 years out markets have been producing crazy ROI when that stops, why would anyone want to invest to lose? At bottom will smart money come back? You betcha! But bottom is a good 4-8 years from now.

    • Alistair McLaughlin 6 months ago

      CAD is influenced by oil, not pegged to it. Regardless, what do you suppose the price of oil will do in the next global recession? Anyone who bought assets in Canada in 1992 because the CAD had fallen precipitously from the year before, making Canadian assets look “cheap”, had to wait another decade before the CAD finally hit bottom in 2002. These things play out over decades, not years. There will no doubt be investors out catching falling knives. They won’t be making money, nor will there be enough of them to put a floor under prices.

    • Alex Johnson 6 months ago

      Bottom line is that it does not mater how low the dollar will go, it won’t have foreign investments rushing in because its a good deal…

      If you want a good deal and spend big money you can always buy some beach front lot in Mexico, buy up condos in Poland or for pennies buy brand new cottages in beautiful areas of Carpathian Mountains of Ukraine for example…again relatively speaking in the use of the word “pennies”.

      When people “invest” in Canadian real estate they are not buying land because the world is running out…far from it, because it simply is not.

      These investors are looking first and foremost to park their money somewhere, and you don’t want to park your money where the currency is weak and economy uncertain. Park and wash your money….trust me no one wants to actually live in Toronto, Toronto is world class only for us Torontonians.

      • Functioning Brain 6 months ago

        Alex I couldn’t have said it better (and I never say is sans typos like you!)

        This whole narrative of Toronto is a world class city makes me laugh! Cold as all FUCK, ugly, weak economy, shitty salaries and financial opportunity, WINTER ALL THE TIME, the entertainment district has been decimated since the 90s, fuck we’re not even very well dressed or attractive on the whole…oh and taxed straight out the rectum! So to rehash:

        Toronto:

        You don’t make any money compared to major global centres (to put it lightly)
        Cold as fuck most of the year
        Not a whole lot of sexy folks, fashion, night life
        Taxes that would make baby Jesus cry
        Ugly city with ugly houses

        If I have a few million to burn, hold, hide I am going to do it somewhere more appealing than Toronto! Unless I really really really like all you can eat sushi joints, snow and slush, a population of grumpy turds draped in grey, paying taxes that seem like a practical joke, hoping to bump into Drake, The Raptors and going to the AGO or ROM enough to lose millions…

        Investment here ballooned because of abnormal ROI that is now a footnote in history.

      • Maria 6 months ago

        Alex, you’re suggesting to buy in Mexico, Poland and Ukraine, but not in Canada because “the currency is weak and economy uncertain”. I doubt that there situation is any better. Georgia could be better… it became a member of the EU last summer.

        • Functioning Brain 6 months ago

          I don’t think he is actually suggesting that, I think he is saying that if people want a conversion bargain there are better ones to be had, but no one seems to want them. So implied in that is that none is going to care about conversion ratio here either.

          • Maria 6 months ago

            No worries, I get it:) Still, after reading you guys, I think that moving all CAD into US currency for those who has savings and planning to buy a home in Canada is a good idea right now. Also, what’s happening with Canadian AAA in case of this looming crisis?

  • Functioning Brain 6 months ago

    Our dollar value dropping is great for exports historically mind you unless nafta gets fux and Trump keeps going all protectionist, then we will see an economic climate we have literally NEVER SEEN BEFORE. I like when our dollar tanks, I am in exports! Paid in USD living in CAD, conversion is my bff taxes not so much!

  • Bluetheimpala 6 months ago

    Nice to see the fort is holding strong. Never live in the darkness. Time will tell but I think we can all agree the fairy tale is over. BD4L

  • Willy 6 months ago

    A new report was released by an investment network about a week ago on real estate cycle in Ontario and it says over the next 5 years prices are gonna explode up in many cities in Ontario and that we haven’t seen the real boom stats yet. Maybe another 30% to 50% up!? What do you think guys since it is the opposite of what you’re saying

    • Hub 6 months ago

      After a 30 year upcycle, you think we’re just getting started? I think you’re an idiot.

    • Functioning Brain 6 months ago

      Willy I think you should buy as many houses in those areas RIGHT NOW and get ready for payload! HURRY AND BUY THEM ALL NOW! RIGHT NOW! Try to buy at least 10!!! Start tomorrow!

  • Maria 6 months ago

    The real problem with this “explode up” scenario is not Canadian economy or even currency volatility… it’s BEARS!!! that roam freely right outside Toronto metropolis area. For cities, other than Toronto to add value, they have to offer something equal to Toronto jobs, opportunities, universities, go-train…etc. But all you find instead is …bears.

    • Functioning Brain 6 months ago

      I am OK with Bears, they appear to be better at math these days than Bulls.

  • Justin Thyme 6 months ago

    Love these red warnings!

    Red at night, sailor’s delight, red in the morning, sailors take warning.

    They make as much sense as this little ditty.

    America is heading full speed into a financial crisis, and no red flags!

    Anything with ‘GDP’ in it should be taken with a grain of salt.

  • Geo 5 months ago

    Bulls are full of bull, and Bears are desperate 😛

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