Another Rabbit

Steve Saretsky -

Recent data from the Canadian Bankers Association shows the number of Canadians seeking financial relief is still growing, even as the economy re-opens. After having stalled out for a number of weeks, mortgage deferrals began creeping higher once again. As of June 30th, 760,000 Canadians have now opted to defer a mortgage payment. That works out to 16% of total mortgages outstanding across the Canadian banks.

In addition to that, the banks have now approved 445,000 credit card payment deferrals.

In other words, financial reprieve remains plentiful amongst Canada’s most indebted households. A headwind for not on the Canadian economy, but the housing sector in particular.

If that wasn’t enough to get your head spinning, consider the impending contraction of population growth, and household formation. As is typical in recessions, population growth slows as job prospects dry-up. This is particularly the case for non-permanent residents which is made up of foreign students, work permit holders, and refugees.
However, thanks to COVID, the contraction in population growth is likely to be severe this time around. Just this past week, the federal immigration department told international students they will not be allowed to enter Canada if they have received a student visa after the country’s border lockdown on March 18. Even those who have a valid study permit from that date or earlier will be denied entry unless they can prove their travel is “non-discretionary or non-optional.”

“While many Canadian college and university campus locations are closed, classes are generally continuing online. Travel will be deemed discretionary or non-discretionary depending on individual circumstances,” said the advisory.

In 2019, more than 650,000 international students studied in Canada at the post-secondary level.

Now consider local household formation as well. This economic shock has resulted in unprecedented job loss, ultimately forcing renters and young millennials to move back home in order to save money and get their finances on stronger footing.

Really the only bullish case to be made has been created via central banks, and their ability to pull another rabbit out of the hat. Their relentless efforts to devalue the currency and avoid a painful debt deleveraging resulted in a shift to stagflation in June. As economic growth contracted sharply, consumer prices surprised to the upside, inflating 0.7% year-over-year across the nation.

In other words, asset poor Canadians are falling further behind.

Thanks to the generous support of the Bank of Canada, mortgage deferrals could very well be extended. The Bank has now 30x’d their holdings of Mortgage bonds since the pandemic began. Thus doing their best to ensure mortgage rates remain pinned to the floor, and house prices remain levitated.

Three Things I’m Watching:

1. The Bank of Canada has 30x’d their holdings of Mortgage Bonds since the pandemic.

2. The percentage of mortgage deferrals in Canada is more than double than in the US.

3. In the three months through June, 27 firms were granted protection under the Companies’ Creditors Arrangement Act, a federal law that gives insolvent corporations that have debt of more than C$5 million an opportunity to restructure and avoid liquidation. That’s the most in any quarter since 2009.

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The Saretsky Report. December 2022