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November 18, 2015 | Ripples

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.


Two hundred jobs doesn’t sound like all that many. Unless you live in a town of thirty thousand people, and start thinking about what happens when two hundred families lose their income, stop buying cars and maybe have to sell the house.

Besides, it’s a long ways from the western oil patch to the agrarian hinterland east of Toronto. But that’s where Continental’s Veyance Technologies plant is located, turning out components for the awesome conveyor systems which power northern Alberta’s vast oil sand developments. In fact, this factory employs the third-largest workforce in the region. And soon nobody will work there.

Jamie’s a local real estate agent, shocked at the news. “These are high paying jobs and will show many Ontario people that low oil prices can drastically affect them too if they work for manufacturing geared to the oil sands,” he tells me.

While the company is not releasing this news, it is nonetheless seeping out. “Yes, we found out Friday and spoke to Continental,” says the town’s economic development officer. “It is true.  Production will slow down and be complete around July 1, 2016. They are not moving out. They will be closing.”

Also on Friday, StatsCan was releasing the latest manufacturing numbers. Sales tumbled in September with a sharp drop in car-making and anything related to energy – the opposite of what economists had expected. Sales fell in 13 of the 21 industries tracked. This ain’t the greatest news when we have a 75-cent dollar that’s supposed to make our stuff irresistibly attractive to foreigners who have real currency. It also underscores a theme this pathetic blog’s been trying to proffer for a while – the inevitability of oil creep.

Why do we care that Calgary real estate sales have fallen off a cliff or that Canada has but two horny housing markets left? Simple. It’s all about national net worth. So when Shell walks away from a massive new development and leaves $2 billion worth of work buried in the dirt, sending everyone home, it has an impact – local at first, wider later. When we run a monthly trade deficit (as is now routine), it’s no different than you spending more in October than you earned. Not a great long-term strategy.

Alberta lost about 54,000 jobs in the past year. That translates into a lot of families not buying new F150s,  and their employers not ordering replacement conveyor belts. If you think none of this impacts you in downtown Toronto or South Surrey, you’re dreaming. It will.

So, what’s the worst thing that could happen? Instead of the gradual, where-the-hell-are-the-Tums? housing correction that I anticipate, is it possible job loss and rising rates could precipice a run on confidence, and a true bust? One of those has not been seen in Ontario (or BC) for three decades, with the last one bringing average Toronto prices crashing down by 31% over the course of four years. That’s eerily similar to the average 32% plop experienced in the US more recently.

Could history repeat?

You betcha. Looks unlikely right now, but a rerun of the early-90s Canadian crash is possible, given the right combination of factors – like plant closings, job losses, rising debt costs, bigger taxes (Ontario towns will soon be able to levy their own transfer charges) and a general loss of confidence. So what would that mean in a country with record household debt, a 70% home ownership rate and more high-ratio mortgages and real estate leverage than at any time in history? Would it bring CMHC to its knees?

As you know, you can’t purchase a house in Canada with less than 20% down without having to buy mortgage insurance – usually from Canada Mortgage and Housing Corporation, an arm of the feds. The agency insures the lender against default on the part of the borrower (but it’s the borrower who has to foot the premium). So if the market crashes and lots of people walk away from their debts, this could have a major impact on CHMC, which insures a staggering $600 billion in loans.

Agency boss Evan Siddall felt compelled to give a speech on this topic the other day, which should probably scare us. Here is how the industry publication Canadian Mortgage Trends reported it:

CMHC has heavily invested in stress testing its default insurance business, he said. The agency has considered virtually all plausible doomsday scenarios (global deflation, lingering $35 oil, a 9.0-magnitude earthquake in Vancouver, etc.), and even non-plausible ones including a “zombie apocalypse,” Siddall jested. The hypothetical disaster scenario CMHC settled on was a U.S.-style housing bust with a 30% national home price crash and a 500-basis-point surge in joblessness.

“Such an event would result in almost an eight-fold increase in insurance claim losses, from $1.7 billion to $13.2 billion over our five-year planning horizon. Our cumulative net income would go from a $7.5-billion profit to a $2.8-billion loss, again over the five-year planning horizon.”

“Since the government’s fiscal position has benefited from [CMHC’s] historic progress — $15 billion [of profit] over the past decade — it would have to absorb our losses in a stressed scenario…,” he added. But going forward, he hinted that lenders may have to shoulder some of that burden. “…We are exploring ways to share these risks (and profits and losses) more equitably in the financial system.” That could mean lender deductibles or perhaps something else.

Well, there you go. Nothing to see here folks. Keep moving.

The fact is Canada has never has as many high-ratio, high-risk mortgage loans outstanding as it does today. Nor has our subprime mortgage lending sector ever been this large, as people borrow money for downpayments (since CMHC won’t deal with any home over a million). In many ways, the outcome is unknown since it’s fear that drives people into irrational decisions – like walking away from a recourse mortgage. And is CMHC really the right agency to be doing an audit on itself?

Nonetheless, it’s hard to see big numbers of people doing Canadian jingle mail. It’s not in our genes. More likely is stunned citizens hanging on to their homes even when it means eating drywall, watching their equity and net worth diminish monthly, pining for the days when Property Virgins was still on the air.

But this is all conjecture. Unless you live in Bowmanville, of course.

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November 18th, 2015

Posted In: The Greater Fool

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