Why Canadian Economic Crisis Could Be Bad News for U.S. Stock Investors
There could be an economic crisis brewing in Canada. Investors beware; it could have dire consequences on your portfolios.
You see, over the past few years, Canada was going through a period like the one the U.S. economy went through back in 2004–2006. Home prices in Canada, especially in major cities like Vancouver and Toronto, skyrocketed.
A typical detached home in Toronto cost close to CA$1.0 million in April 2017. In Vancouver, detached homes were selling for way over the CA$1.0-million mark.
To saying the least, the Canadian housing market was on fire. And a lot of “Hey, I should buy another property because the housing market never goes down” sentiment was prevailing.
With this happening, something had to be done.
Mind you, during that time, as home prices were soaring, consumer debt started to jump. In the fourth quarter of 2017, the debt-to-household income ratio stood at 170.4%. This means that for every $1.00 of income, Canadians have a debt of $1.70. (Source: “Household debt-to-income ratio edges lower: Canadians now owe $1.70 for every $1 earned,” Financial Post, March 15, 2018.)
So, the government of Canada stepped in and tightened mortgage-lending criteria. A lot of those rules kicked in at the start of 2018.
Guess what happened. Demand in the Canadian housing market is in the slumps.
In March 2018, homes sales were down 22.7% year-over-year—the lowest in four years. (Source: “Canadian home sales improve slightly in March,” The Canadian Real Estate Association, April 13, 2018.)
More than 80% of all the markets in Canada reported a decline in activity.
The number of homes on the market is increasing quickly. As of February, there were 5.3 months of inventory available—the highest level in two-and-a-half years.
Home prices are plunging. The average price in March was $491,000. This was 10.4% down year-over-year.
What’s Next?
Now, throwing more gas on the fire…
You know how the Federal Reserve is raising rates? The Bank of Canada is doing exactly the same.
What do you think will happen to the mortgage rates? They will also go higher, even though it’s already difficult to get a mortgage.
There’s one more thing. According to a report by the Canadian Imperial Bank of Commerce (NYSE:CM), a major bank in Canada, 47% of all mortgages in the country will need to be refinanced in 2018. (Source: “Nearly half of existing mortgages face renewal in 2018: CIBC report,” Financial Post, April 11, 2018.)
See a problem yet?
Dear reader, Canada could be going through an economic crisis of sorts in the coming quarters and years. You have to ask what will happen as mortgage rates are going up since it’s already difficult to get a mortgage.
A lot of homeowners could be faced with a question that Americans faced back when the U.S. housing market was falling and mortgage rates were going higher: Do we pay our mortgage payments?
Now, one could ask “Why does an economic crisis in Canada matter for me?”
You see, a lot of American companies do business in Canada. An economic crisis in the country could definitely impact their revenues and profits.
It can’t be stressed enough; keep a close watch on Canada. If the country faces headwinds, it could have spillover effects on the U.S. economy and the major stock indices.