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28 January 2011

CIBC's Comments on Consumer Debt

National News CIBC Reports Household Debt Levels At Their Lowest Since 2001

National News

CIBC Reports Household Debt Levels At Their Lowest Since 2001 .
Friday, 28 January 2011 10:30

It seems that all the messaging about slowing down with the accumulation of debt is resonating with Canadians.

According to a new report released by CIBC, Canadian household debt levels are at their lowest levels since 2001.

The Household Credit Analysis Report states that inflation adjusted growth in household credit in the Q3 2010 reached the lowest levels in the past decade. Similarly, the 0.27 % increase in credit during November (the latest available data point) was the lowest monthly increase in 15 years.

"After coming through the most leveraged period of consumer spending in recent history, Canadians are getting the message that they need to cut back on their debt levels," says Benjamin Tal, Deputy Chief Economist at CIBC. "After rushing back to shop in 2010, consumers will take a well-deserved break in 2011. The softening in the monthly pace of job creation from an average of 31,000 in 2010 to 20,000 in 2011 will single-handedly slow growth in personal spending by more than 0.4 percentage points.

"But as important will be the change in the propensity to spend. With the U.S.-Canada saving rate gap at a 40-year high, and ongoing indications that monetary authorities wish to curtail the risky level of household debt, 2011 should see the beginning of an adjustment in the household balance-sheet."

Despite significant slowdowns in credit accumulation, the same cannot be said for mortgages- which are still rising by 7% year-over-year, although indications are that this trend is slowing down.

"A closer look at the monthly pattern reveals that the market is now growing by a monthly rate of only 0.4-0.5 per cent," says Tal.

“The reduced demand for mortgage credit is more notable among first time home buyers—a trend that is already visible in the brokerage channel. The recent changes to the market introduced by the Ministry of Finance recently are not significant enough to derail the market, but are sufficiently targeted to soften marginal borrowing. We estimate that the move to shorten the maximum mortgage amortization from 35 years to 30 years will cut the growth in mortgage originations by roughly two to three percentage points in 2011. Overall we expect mortgages outstanding to rise by close to five per cent in 2011 after an estimated 7.7 per cent increase in 2010."

According to the report, mortgage arrears hit their highest point in February 2010, and are now coming back down to earth. The arrears rate currently resides at 0.43 %—up from 0.24 % in early 2006.

Also on their way down are consumer bankruptcies- which are falling year-over- year by 25%.

"Our expectations that the housing market will stagnate in 2011 and might even see some softening in the second half, suggest that the estimated eight per cent rise in net worth in 2010 will not be matched in 2011. And with consumer spending dancing to the tune of changes in net worth this represents another source of slowing for consumers." concludes Tal.

Business as Usual

National News 'Business As Usual' After Mortgage Rule Changes Announced For This March National News

'Business As Usual' After Mortgage Rule Changes Announced For This March
Thursday, 27 January 2011 19:13 David Hatton, Editorial Team

Daniel Bloch finally heard details of federal Finance Minister Jim Flaherty’s mortgage rule changes when he was watching the evening news.

“I was a bit surprised when I learned some of the details but it’s not too bad,” said the Century 21 Heritage Group Ltd. realtor in Thornhill, Ont. “You just have to adapt and adjust. There’s really not much else you can do.”

Almost ten days after Flaherty announced he was tightening mortgage rules for the second time in a year, realtors and mortgage brokers across the country say its business as usual.

But record low interest rates could be another entirely different story.

“I actually had three of my clients who were first time home buyers that asked about it, but others weren’t even aware of the changes. There was one other client who didn’t like it … the downpayment was already an issue with them, though,” Bloch said.

One veteran Vancouver mortgage broker, who asked not to be named, saw it as “government backtracking” on their earlier decisions. The Conservatives allowed the Canada Mortgage and Housing Corp. to lift its 25-year limit on mortgages in 2006 and insure them up to 40 years.

“Then he brought then 40-year term back to 35 years in 2008 and this was just trying to cover up on that initial decision,” he said. “Ultimately they are just trying to hide their earlier mistakes.”

“Smart home buyers should still lock in their mortgages before the changes come into effect on March 18th.”

Flaherty said he was shortening the maximum amortization period to 30 years, from 35 years, and lowering the refinancing limit from 90 per cent of a home’s value to 90 per cent. He added the government was also withdrawing insurance on the popular home equity lines of credit.

The move comes after conflicting reports about Canadians and their ability to handle debt. Statistics were released showing Canadian households were still piling on debt amid historically low interest rates. Statistics Canada analysts reported the average Canadian household debt at a record 148 per cent of income, and the debt-to-income ratio is higher than in the United States.

In a new research report released Wednesday, however, economists at the Canadian Imperial Bank of Commerce had another point of view.

"The Bank of Canada continues to warn Canadians about the risk of rapidly rising household debt, but the reality is that slowly, behind the scenes, credit growth is already softening," wrote economist Benjamin Tal, of CIBC World Markets.
Tal said that trend first showed in the third quarter of last year, with inflation-adjusted credit growth during the last quarter dropping to the slowest pace in more than nine years. He added it was also the third quarter when the Canadian critical debt-to-income ration reached the record 148 per cent.
That could mean that when interest rates rise, the carrying costs of that debt can cause problems for consumers. But it doesn’t necessarily show the national mortgage market is headed towards a meltdown similar to what happened in the United States, said Tal.

In order to trigger such a bust, the high debt levels must be accompanied by a three or four point jump in interest rates or a catastrophic event like the subprime U.S. mortgage crisis. Canada has never faced either of those last two situations, he said, and “that’s why we could have an overshoot in housing prices without having a bubble or bust.”

It wasn’t the first time CIBC economists have downplayed alarmist fears in the housing market. The bank’s chief economist, Avery Shenfeld, disagreed in late 2009 that Canadians were headed for a “U.S. style housing and mortgage blowup.”
Tal predicted this week that although high debt levels can cause stress for consumers, their financial health is otherwise strong The only risk present is that the economy will slow during an already gradual recovery.
"Inflation-adjusted growth in household credit in the third quarter of 2010 was the slowest in more than nine years, while the 0.27-per-cent increase in credit during October of last year (the latest available data point) was the softest monthly reading in more than 15 years," he said in his report.

"Consumer spending in the past two years was by far the most leveraged in recent history but this trend is starting to normalize.”

"Growth in consumer credit is already decelerating (mainly in sources that are used largely for consumption such as credit cards and lines of credit). And as the ratio of growth in borrowing to spending returns to normal in 2011, look for growth in consumer expenditures to take an additional haircut,” Tal added.

Analysts from other banks echoed the concern that record interest rates, combined with high debt loads, could still cause problems for the Canadian economy. And they might be going up sooner than most people think.
"If you believe that interest rates are normal right now, you are suffering from serious delusional thinking. They will be going higher," said Scotiabank Chief Economist Warren Jestin told a St. John's Board of Trade meeting last week.

He also predicted interest rates would continue to trend higher, and those who took on high debt may get taken by surprise and default on their loans when rates sharply go back up again.

Flaherty likely considered it important to act now rather than including the changes in the upcoming federal budget because of the risk of an election, Michael Gregory, a senior economist with BMO Capital Markets, added in his own research report. If one of the three opposition parties opposed the budget in the House of Commons, it could have sparked an election because the Conservatives do not have a majority government.

“…these measures were obviously deemed too important not to be passed and put in place for when Canada’s housing market wakens from its winter slumber,” Gregory wrote in his report.

The Canadian Association of Accredited Mortgage Professionals (CAAMP) released their own report just after Flaherty’s announcement showing the risk of mortgage rates rising to unaffordable levels in the near future is “negligible”.

The group’s chief economist Will Dunning explained that a majority of buyers left themselves a bit of room to absorb an increase of one per cent on fixed rate mortgages and even higher on variable ones.

David Hatton is a regular contributor to PropertyWire.Ca and the owner of, a company that specializes in creating original content for realtors and their websites.

27 January 2011


Mortgage Brokers Given A Voice: Survey Finds That Negative Reports about American
Mortgage Brokers Has a Harmful Impact on Canadian Mortgage Brokers
Canada’s mortgage brokers are voicing concerns that negative press in the United States is
hurting their business, and their reputations. The findings are a result of a survey of over 500
Canadian mortgage brokers conducted by the Real Estate and Mortgage Institute of Canada Inc.
According to REMIC President Joseph White, Canadian mortgage brokers feel that they are
being inaccurately tarnished by their American counterparts.
“Canadians have been inundated with stories of how mortgage brokers in the United States, due
to questionable business practices, contributed to the American mortgage meltdown,” White
said. “Canadian mortgage brokers typically employ sound business practices, are highly
regulated and ongoing surveys show that their customers exhibit high levels of customer
satisfaction, a far different experience than what has been reported in the United States.”
“The survey further indicates that Canadian brokers want to see a more accurate reflection in
Canadian media of the uniquely Canadian experience,” White concludes, “a reflection that has
been overshadowed by the negative reports about their American counterparts.”
The Real Estate and Mortgage Institute of Canada Inc. was founded in 2008 and provides
education, training and resources to both the real estate and mortgage industries.
For more information or to schedule an interview with Joseph White please call Cain Daniel,
Director of Education and Training at 905-464-2246 or e-mail Cain at
Survey Findings
The REMIC survey was conducted from January 12th to January 25th.
Survey Size:
512 mortgage agents/brokers
843 individual comments were collected regarding the various survey questions
Geographical Breakdown:
Ontario 40%, Alberta 30%, British Columbia 30%
Several questions were asked in this survey and results will be published over the next two
Overall, 72% of respondents feel that the negative press about U.S. mortgage brokers has
negatively affected their business. There is a difference in perception depending on the province
In Ontario, 80% of respondents felt this way, while in British Columbia 78% of respondents and
in Alberta, 56% of respondents reported the same belief.

25 January 2011

Home Values - Will they go up or down?

Some interesting facts
The national average home price in December was $344,551 — up two per cent from December 2009. The Canadian Press 01/14/2011

Many experts are advising that Canadian home prices are overvalued by 14%. “the average price of a home has risen by almost 23 per cent since the cyclical low of January 2009, and about 7 per cent above recession levels. As a result, at least 1.5 million homes across Canada are overvalued, particularly in western Canada, and a price drop of 5 to 10 per cent over the next 12 months would not be unlikely”, said Benjamin Tal of CIBC.

In case you have forgotten the depth and velocity of the previous market reversal when Canadian real estate prices plunged in 2007-08; householder equity vanished as follows: (SFD single family dwelling)
• Average Vancouver -SFD lost $122,900, or 15.9% in 8 months
• Average Calgary -SFD lost $92,499, or 18.3% in 18 months
• Average Edmonton -SFD lost $78,719, or 18.5% in 21 months
• Average Toronto -SFD lost $55,055, or 13.8% in 9 months
• Average Ottawa -Residence lost $25,664, or 8.6% in 6 months
• Median Montreal -SFD lost $6,000, down 2.6% in 6 months

Extracted from an email by April Morin

3 January 2011

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