Tuesday, April 29, 2008

The Canadian consumer is extremely healthy

Banks bank on ‘healthy' Canadian consumer,

TARA PERKINS AND LORI MCLEOD Globe and Mail April 29, 2008 at 9:26 PM EDT

“The Canadian consumer is extremely healthy right now,” Dave McKay, the new head of domestic banking at Royal Bank of Canada, said at a presentation for analysts in Toronto.

“The Canadian consumer is strong, they have not leveraged the equity in their homes nearly to the extent the U.S. has, so there is still opportunity there,” he said, noting the need to be prudent.

But “I do not lose any sleep at night about our home equity business whatsoever,” Mr. McKay said, noting that “you can't compare the Canadian and U.S. home equity market, they're just night and day.”

Yet another sign of a top?

This dude Dave has really drunk the Kool-aid or more likely, he is talking up his company. He is saying that people can even take out more money from this homes (since they didn't get as crazy as the Americans) and that he is sleeping well at night.

Does he not see the turn in the Canadian housing market? The other housing markets in the world that are falling? The commodity bubble that seems to be starting to implode again as the US dollar strengthens? Nope, he points to record employment and the fact that Canadian banks keep their mortgages on their books as reasons that things will not fall apart here.

I believe that the job market has turned in recent months and that things are really slowing down in Montreal and Toronto based on my limited contacts. I'm not hearing about layoffs yet, but this is to simply point out that if the housing and commodity markets head south, the job market will follow. Housing lead the job market in the US and I believe a similar thing is happening worldwide.

As for keeping mortgages on the books: I will need to research this, but my gut feeling is that the banks were giving money away in many cases. In a boom, banks make money by lending to anyone. In a crunch, they stop lending to almost everyone.

Even Mr RBC Bull points out an alarming point (for a bull):

There has been a shift toward lengthy mortgage terms of 40 years. Mr. McKay said it's something RBC has been warning customers about. Bank staff tell customers their interest and carrying costs will go up with lengthier mortgages, and make them aware of the pitfalls and costs, he said. Customers are responding by saying “I understand that,” but they want to free up their cash flow in the shorter-term, and plan to pay off their mortgage in fewer than 40 years by making lump sum payments, he said. “Customers have consistently told us that they plan on managing it,” he said. “Whether they can all do it or not is a good question.”

Of course customers plan on managing it. They assume that the good times will always be here and that they will always have a job, no need for any savings and they will make a lot more money in the future. Plus, their house will appreciate 20% per year....

Conclusion: I don't buy it. The Canadian consumer is doing OK for now because of the huge windfall from the commodity and housing bubbles and a soaring Canadian dollar (that has lowered core inflation). If those one-time factors are finished for at least the time being and the credit crunch really rears its ugly head, our Canadian consumer will be headed to the doctor.

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