Canada’s economy unexpectedly lost 6,600 jobs in September, largely because a steep drop in part-time jobs outweighed gains in full-time positions. Market operators had expected a gain of 10,000 jobs. Statistics Canada said the unemployment rate edged down to 8.0 percent from 8.1 percent in August.

Still, economists suggested the headline jobs data masked some underlying strength. Most important, full-time jobs gained for a second straight month, by a robust 37,100, compared to a 43,700 drop in part-time employment. Scotia Capital said this likely represented a conversion of part-time work to full-time work, which is a “mild positive” as it expands hours worked. Plus, full-time jobs are generally better paying and more stable.

Meanwhile, Canadian Finance Minister Jim Flaherty claimed to be encouraged by the country’s September jobs data.

“I’m not surprised. We’re seeing moderate growth in Canada. I’m encouraged by the growth in full-time jobs, the unemployment rate has dropped.

Canadians ought to expect we will see continued moderate growth. We’re in much better shape than most other industrialized countries.”

Over the course of 2010, the rate of part-time job creation has outpaced full-time and, as a consequence, the number of hours worked remains below the peak level hit prior to the economic downturn, said Dawn Desjardins, assistant chief economist at Royal Bank of Canada.

“At the same time, debt levels have been rising with the household debt-to-income ratio hitting a new high early this year,” she said. “The prospect of more moderate growth going forward suggests that labour market conditions will improve more slowly in the months ahead and that the unemployment rate will only gradually drift lower.”

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Canada makes a useful comparison for the U.S. Both countries are rich, advanced, stable, have sophisticated financial systems and pioneer histories, and stretch from Atlantic to Pacific. But Canada has no housing GSEs. Mortgage interest is not tax deductible. It does not have 30-year fixed rate, freely prepayable mortgage loans.

Mortgage lending is more conservative and much more creditor-friendly. Canadian mortgage lenders have full recourse to the mortgage borrower’s other assets and income, in addition to having the house as collateral. This means there is little incentive for borrowers to “walk away” from their mortgage. The absence of a tax deduction for mortgage interest probably increases the incentive to pay down debt. Most Canadian mortgage payments are made through automatic debit of the borrower’s checking account—a technical but important point. Canadian fixed-rate mortgages typically have prepayment penalties to protect the lender and the interest rate on the loan is fixed for only up to five years.

This relative creditor conservatism has meant that Canada and Canadian banks have so far come through the international financial crisis in much better shape than their U.S. counterparts. Canada didn’t avoid the recession, but mortgage delinquencies have so far remained much lower than in the U.S., with the percentage of loans delinquent 90 days or more at approximately one-tenth of the U.S. level.

What about the home ownership rate—the percentage of all households owning their own home? Isn’t there a home ownership price to pay for this Canadian credit conservatism? No.

Here’s the home ownership rate in Canada: 68%. In the U.S. it’s 67%. The U.S. rate peaked at the top of the housing bubble at 69%. In other words, two very different housing finance systems, one much riskier than the other, produced virtually the same home ownership rate.

This must cause us to call into question longstanding U.S. beliefs about the relationship of government-subsidized housing finance to home ownership.

The former savings-and-loan industry justified its special tax and regulatory privileges, including its right to pay more interest on deposits than commercial banks were then allowed to, by appealing to its role in home ownership. Then came the savings and loan collapse of the 1980s.

Fannie Mae and Freddie Mac took over the home ownership mantra. In the vast risk expansion of their arrogant days, with very high rates of profitability made possible by government-granted privileges, they justified these privileges by appealing to home ownership. It was often said by their supporters that the GSE-dominated U.S. housing finance system generated the highest home ownership rates in the world, which was false, and that this system was the “envy of the world,” which was also false. Fannie Mae’s annual reports regularly featured a house with an American flag flying.

Now it is clear to everyone that Fannie and Freddie, having done so much to help inflate the bubble and having been dragged into insolvency by its deflation, are wards of the government. The taxpayer bailout of these GSEs is likely to cost much more than the bailout of the saving and loans did a generation ago. The U.S. Treasury has unilaterally signed the taxpayers up for unlimited support of these bankrupt purveyors of government-advantaged mortgage finance.

So the widespread previous beliefs about the desirability of having GSEs were wildly mistaken. It ought to be clear by now that an entity can be a private company with market discipline, or it can be a government body with governmental discipline, but it can’t be both.

In this context, it is important to recognize that Canada does have a government body to promote housing finance: the Canada Mortgage and Housing Corporation (CMHC), which is the dominant credit insurer of mortgages in the country. Whether or not you like the idea of such a government financing operation, at least its status is perfectly clear and honest. The Canadian government owns 100% of its stock. Its guaranty from the government is explicit. It provides housing subsidies which are on budget and must be appropriated.

Let’s remember that the original sin of making Fannie a GSE in 1968 was to get it off the federal budget so the deficit looked smaller. Canada in this respect looks superior to the U.S. in candor as well as credit performance.

By Alex J. Pollock, resident fellow at the American Enterprise Institute in Washington, D.C.
Mr. Pollock was president and CEO of the Federal Home Loan Bank of Chicago from 1991 to 2004.

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That was the one significant change in its scheduled interest-rate announcement, and analysts might interpret this as a first step by the central bank to ready markets for an interest-rate hike.

“The Bank of Canada is now walking not crawling towards the exit,” said Kathy Lien, director of currency research at fx.360.com, following the release of the statement.

“Change is afoot. Evolutionary change, but change nonetheless,” added Stewart Hall, economist at HSBC Securities Canada.

For nearly a year, the central bank has pledged to keep its benchmark rate at 0.25 per cent until July in an effort to pump up economic growth, on the condition that inflation would not hit its preferred two per cent target until mid-2011. The central bank’s mandate is to set its key policy rate at a level to achieve two per cent inflation.

In previous statements, the central bank had suggested inflation risks were titled downward because of the possible need to engage in quantitative easing, in which the Bank of Canada would flood financial markets with cash in an effort to spur lending and combat deflation.

But through the statement, the central bank might be indicating deflation is no longer a concern.

“The bank judges that the main macroeconomic risks to the inflation projection are roughly balanced,” it said, with upside risks being stronger-than-projected growth, while a protracted recovery and strong Canadian dollar flagged as downside risks.

Hall said this shift in nuance was “indicative of the need for a policy change at some point.”

The change in the inflation outlook emerged after Statistics Canada reported that the economy grew at a five per cent annualized rate in the fourth quarter of last year – blowing past market expectations for a four per cent gain and the central bank’s original 3.3 per cent forecast. Economists say the fourth-quarter performance has set the stage for another robust gain, of perhaps four per cent or more, for the first three months of 2010.

Recent data indicate that both the headline and core inflation rates have moved much closer to the two per cent level than the central bank had expected. Under the bank’s forecast, the two per cent level would not be reached until the third quarter of next year.

“Core inflation has been slightly firmer than projected, the result of both transitory factors and the higher level of economic activity,” the central bank said in its one-page statement. “The outlook for inflation should continue to reflect the combined influences of stronger domestic demand, slowing wage growth, and overall excess (economic slack).”

In its economic outlook in January, the central bank said stubborn unit labour costs along with increases in property taxes and other administered prices accounted for the recent “stickiness” of core inflation.

The longer inflation stays “sticky,” analysts say, the more likely that the output gap, or the measure of excess economic capacity, is narrowing at a faster pace than previous central bank expectations.

The bank has said it anticipated the output gap to close in the third quarter of 2011. A large amount of excess production capacity suggests a lack of consumer demand, and gives producers little to no pricing power.

Meanwhile, the central bank also acknowledged that economic activity has been “slightly higher” than its own projections, with the five per cent gain in the fourth quarter powered by “vigorous domestic demand” and a recovery in exports.

“The underlying factors supporting Canada’s recovery are largely unchanged – policy stimulus, increased confidence, improved financial conditions, global growth and higher terms of trade,” the bank statement said.

It added that “persistent strength” in the Canadian currency and the “low absolute level” of U.S. demand would continue to act as “significant drags” on economic activity.

“The Bank of Canada has walked a fine line with its latest decision, though overall it is undeniable that the risks to Canadian monetary policy are starting to tilt upwards,” said Eric Lascelles, chief economics and rates strategist at TD Securities. He added the firm’s view was that the central bank would not begin raising rates until the fourth quarter, “but it is hardly inconceivable that this could now come a touch sooner, in September or possibly even July.”

The central bank’s next statement on interest rates is April 20, and two days later it will release its updated economic forecast. Meanwhile, the governor, Mark Carney, has scheduled two speeches this month in which he may provide further guidance as to how the bank would behave as its conditional pledge comes to an end.

Source:
Edmonton Journal

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Worth noting that the previous record high in November for the province of Alberta has been surpassed , and is now sitting at 0.75% (up from 0.72% in November, and 0.40% a year prior).

For the whole of Canada the rate was up just slightly, now sitting at 0.45% (up from 0.33% a year ago).

Most of the other provinces fluctuated within a mere 0.01%, except Saskatchewan, where it climbed 0.02%, but is still a national low, 0.29% (up from 0.23% a year prior).

The Atlantic provinces continue to have the second highest rate (a distant second behind Alberta), sitting at 0.51% (up from 0.42% a year prior).

British Columbia continues their slow but steady climb, and sit at 0.40% as of December, up from 0.23% a year ago.

However,  when viewed in perspective, it appears that the absolute number of arrears in Canada is still very low when compared to other countries, with less than 5 out of 1,000 Canadian mortgagors being late on payments.

Also, it must be taken into account that although there are 5,699 more borrowers in arrears than a year ago, 91,986 more mortgages have been processed during that same period, out of four million active mortgages in total. These numbers show that on an absolute basis, arrears have not been excessively high in Canada.

The single factor that has always most influenced the rate of mortgage arrears is employment,  more even than rising interest rates.
The chart below from Will Dunning Economic Research illustrates the relationship between Canadian employment rate and the percentage of mortgage arrears:

As it can easily be seen, when employment goes up, arrears go down, and when employment goes down, arrears go up, which makes perfect sense.  It isn’t very surprising that when mortgage takers are employed they have no difficulties honoring their debts and when there are more people employed there is a larger pool of people who qualify for mortgages.

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The study begins by pointing out that as of October 2009, there was $952 billion of residential mortgage credit outstanding in Canada. This was about 60% higher than just five years earlier, representing a growth rate of 10.0% per year. This growth rate was far in excess of growth of incomes and therefore mortgage debt has become a growing burden for Canadian households.

During the recession housing activity slowed and there has been a corresponding deceleration of the growth rate for the mortgage market. As of October 2009, the annual growth rate was 7.1% (an expansion of $63 billion). Growth of mortgage credit has slowed compared to prior years, but remains quite robust.

Rapid growth of mortgage credit has two principle causes:

1. Increasing housing prices. During the past five years the average selling price in Canada has increased by an average of 7.8% by year, and average mortgage amounts have increased.
2. Since the late 1990s there has been a profound shift of Canadian households into home ownership. As of 1996, the Census found that 63.6% of Canadian households were home owners. By 2006, the share had increased to 68.4%. Today, the share is close to 70%. Most new home owners require mortgages and therefore the number of mortgage holders has increased very rapidly, from 3.54 million in 1996 to about 5.425 million today, an increase of almost 2 million. This tenure shifting from renting to home ownership accounts for at least one-half of the growth of Canadian mortgage credit.

This data certainly gives rise to a question of whether Canadians are taking on too much mortgage debt. But, the data already shown – that a large share of the growth in debt is due to an epochal shift from rental tenure to home ownership – is our first reason to reduce our concerns, so long as Canadians are being prudent. And, the data shown below says that they are.

Despite rising home prices, first-time mortgagors took out “far less” than they could afford last year, says CAAMP.

“The vast majority of Canadian mortgage borrowers are not taking on undue risks. They have factored rising interest rates in to their mortgage decisions,” stated Jim Murphy, president and CEO of CAAMP.

CAAMP ran simulations to estimate what would happen if the Bank of Canada hiked rates 3% over two years (and fixed rates rose 1.25%).

It found that income gains should offset much or all of the increases in mortgage payments that most Canadian’s would experience.

“The bottom line from the simulations is that even though mortgage payments will probably rise for most borrowers, the increase in their incomes will more than offset the higher payments,” said CAAMP chief economist Will Dunning. “All in all, the degree of risk from rising mortgage rates appears to be small and manageable,” he writes.

A key finding in the report was that 86% of Canadian home buyers took out fixed rates in 2009.  Here’s a breakdown of the terms they selected:

• 5% chose 1- to 2-year terms
• 20% chose 3-year terms
• 5% chose 4-year terms
• 70% chose 5- to 10-year terms

Other notable findings from the study:

• 5%: Number of Canadian households who purchase a home each year.
• 50-60%: Number of those who are first-time homebuyers.
• 0.03%: Percentage of first-time home buyers (compared to all home owners) that are “pushing the envelope” by getting mortgages they may not be able to afford.CAAMP estimates these “at-risk” borrowers amount to 4,000 households out of 13,250,000 in Canada.
• 10%: Annual growth rate of mortgage debt in the last five years.

”This growth rate was far in excess of growth of incomes and therefore mortgage debt has become a growing burden for Canadian households,” CAAMP said.

CAAMP attributed this growth to rising home prices and increased home ownership. 70% of households now own homes, versus 63.6% in 1996.

• 5.425 million: Number of Canadian mortgage holders.
• 22.3%: Average GDS ratio of a home buyer in 2009
  
  32% is the traditional GDS maximum. This stat is a pleasant surprise. According to CAAMP’s findings, most Canadians appear to be underbuying, not overbuying–as some critics charge.
  
• 32.8%: Average TDS ratio of a home buyer in 2009Similar to GDS above, this is well below the standard. 40-42% is the typical TDS maximum.
• 0.44%: Current percentage of mortgage holders in arrears.CAAMP says arrears averaged 0.50% in the 1990s. Mortgage arrears are highly correlated with Canada’s employment rate. Reduced hours/pay and separations/divorce are secondary factors. CAAMP says it “appear(s) most likely that the arrears rate is close to peaking.”

Dunning closed the report by writing:

“No harm can be done by reminding Canadians to be prudent in borrowing money.
But… Virtually every Canadian who is in a position to buy a home and qualify for a mortgage is well-educated and capable of assessing what is in their best interests, of looking forward, and of anticipating threats to their financial well-being.
The Canadian mortgage lending industry is amply incentivized to avoid making bad loans and to optimize risk exposures.
This research on the characteristics of recent mortgage transactions suggests very strongly that current rules and practices are resulting in an acceptable level of mortgage related risks in Canada.”

About CAAMP

CAAMP is the national organization representing Canada’s mortgage industry. With over 12,000 mortgage professionals representing over 1,600 companies, its membership is drawn from every province and from all industry sectors.

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