CANADA ECONOMICS

REAL STATE - HOUSING BURBLE

The Globe and Mail. May 10, 2017. Home Capital sees further drawdown in deposits

Home Capital Group Inc. says it saw another drawdown on its on-demand deposits over the past 24 hours, giving the company a little less financial flexibility as it continues to grapple with a funding crisis.

In a release on Wednesday, the alternative mortgage lender said its high interest savings account (HISA) balances at Home Trust likely fell to $134-million as of this morning, versus $146-million on Tuesday – a decline of 8 per cent.

Meantime deposits at the company’s retail savings bank Oaken fell to $159-million as of Monday, compared to $165-million on Sunday.

The company’s liquid assets stood at $1.01-billion as of Tuesday night – down modestly from $1.1-billion the day before.

On Tuesday, the company announced a tentative plan to sell up to $1.5-billion in its mortgages to an unnamed third party. Investors greeted the news warmly, driving the stock up almost 30 per cent on the Toronto Stock Exchange.

Analysts also reacted favourably on Tuesday to the company’s plan to transition its business model to increasingly focus on selling its mortgages as opposed to holding them on the balance sheet.

“With a large number of mortgages coming up for renewal, a near-term risk has been the ability to find these renewals in the face of a shrinking deposit base,” wrote Cormark Securities Inc. analyst Jeff Fenwick in a note to clients on Tuesday.

“This agreement effectively eliminates this risk and enables Home Capital to continue some modest level of origination activity.”

Home Capital said the change will result in a decline in near-term profitability and a shrinking of the firm’s assets.

Late last month, a syndicate led by Healthcare of Ontario Pension Plan (HOOPP) arranged an emergency $2-billion credit line for Home Capital at an initial interest rate of 10 per cent. Home Capital has drawn down $1.4-billion so far. The Globe and Mail reported on Tuesday that Toronto-Dominion Bank also participated in the syndicate.


The company is scheduled to report its first quarter results after the market closes on Thursday. Management will host a conference call the next morning. Analysts will listen for any colour the company may provide on loan originations, funding and current profitability.

The Globe and Mail. May 10, 2017. ANALYSIS. Countering ‘grossly misinformed’ opinions on Canada’s mortgage, housing markets
MICHAEL BABAD, Columnist

Briefing highlights

• Scotiabank's 10 points on housing
• CPPIB joins Bombardier revolt
• Global markets mixed so far
• New York poised for weaker open
• Loonie at about 73 cents
• Charlie Brown joins DHX Media
• ‘Grossly misinformed’

Bank of Nova Scotia’s head of capital market economics is taking pains to spread the gospel on mortgages and housing in Canada.

For a couple of days now, Derek Holt has tried to counter what he believes is bad information about mortgage financing and housing markets.

This comes amid the turmoil at Home Capital Group Inc. and widespread concerns over inflated housing markets in and around Toronto, with the latter sparking sweeping new Ontario measures.

It comes, too, after years of warnings about record levels of household debt.

“Interest in Canada’s mortgage financing system and housing market from domestic and foreign accounts remains high,” Mr. Holt said in a research note.

“On balance, I continue to believe that efforts to equate what has happened in Canada over time to what happened to non-conforming loans and riskier strategies elsewhere to be grossly misinformed,” he added.

In charts and text, Mr. Holt laid out 10 points in his daily note Tuesday to provide “a snapshot of the breadth of products and their utilization with a focus upon the ones that are perceived to be riskier in nature.”

1. About one-third of households in Canada carry a mortgage. The rest either rent or own outright.
2. “Reliance” on interest-only home equity lines of credit, or HELOCs, is low. That includes those outstanding and recent.
3. Amounts drawn on those HELOCs , in percentage terms, are “fairly modest.”
4. Homeowners hold “relatively high” levels of equity in their properties. Said Mr. Holt: “Note the virtual absence of negative equity and low-equity mortgages following various rounds of tightened mortgage rules.”
5. Withdrawals on home equity are “modest and mostly skewed toward relatively prudent purposes.”
6. Mortgage amortizations of more than 25 years “have pretty much disappeared following their elimination as an insured option.”
7. Most first-time home buyers are using their savings for down payments.
8. Remember how new rules now mean borrowers must qualify at a five-year posted rate? Since then, Mr. Holt said, “significant padding to rate risk has been imposed on the mortgage market as judged by the spread between the qualifying rate and the rates that are actually paid ... This offsets much of the concern about a potential rate shock.”
9. Most mortgages are fixed. Indeed, the percentage of fixed-rate mortgages rose in those taken out last year.
10. While a proxy for mortgages aimed at buying to let now accounts for about 10 per cent of financing, that includes “fully” renting out a property or part of one’s own.

Most Canadians, of course, understand the system. Some observers who don’t live here may not quite get it, and, thus, may have visions of American-style meltdowns dancing through their heads.

Which is why Canadian banks are suddenly being asked about the situation. “In addition to a sweep of mortgage product characteristics are arguments that are well understood across the domestic account base but still imperfectly understood abroad,” Mr. Holt said.

“Banks have full recourse over incomes and assets so forget about no-recourse loans,” he added.

“By law, one has to take out mortgage insurance if one has less than a 20-per-cent down payment and said insurance has been guaranteed through explicit government-backed guarantees.”


Securitization is also not a particularly big issue in Canada, Mr. Holt added.

REUTERS. May 10, 2017. Home Capital withdrawals continue but at slower rate
By Matt Scuffham

(Reuters) - Canada's biggest non-bank lender Home Capital Group Inc HCG.TO on Wednesday published data showing depositors were continuing to withdraw funds but at a slower rate than before.

Home Capital said its high-interest savings deposits were expected to have fallen to about C$134 million ($98 million)following the completion of Tuesday's settlements, compared with a balance of C$146 million the day before and C$192 million after the settlement of Friday's transactions.

Depositors have withdrawn more than 90 percent of funds from Home Capital's high-interest savings accounts since March 27, when the company terminated the employment of former Chief Executive Martin Reid.

The withdrawals accelerated after April 19, when Canada's biggest securities regulator, the Ontario Securities Commission, accused Home Capital of making misleading statements to investors about its mortgage underwriting business. The company has said the accusations are without merit.

Home Capital relies on deposits from savers to fund its lending to borrowers, such as self-employed workers or newcomers to Canada, who may not meet the strict criteria of the country's biggest banks. Its problems have coincided with the introduction of measures to cool Toronto's red-hot housing market, including a tax on speculative buyers, and sparked worries it could trigger a broader housing market collapse.

Last month, the company agreed to receive C$2 billion in emergency funding from the Healthcare of Ontario Pension Plan (HOOPP). Its shares have lost more than two-thirds of their value since March 27 but have rebounded by 50 percent this week as investors digested moves to strengthen its board and stem a flow of customer withdrawals.

The lender said on Tuesday that an unnamed buyer intends to purchase up to C$1.5 billion ($1.1 billion) worth of its mortgages.

(Additional reporting by Swetha Gopinath in Bengaluru; Editing by Saumyadeb Chakrabarty and Nick Zieminski)

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The Globe and Mail. May 10, 2017. U.S. withdrawal from NAFTA is back on table: Wilbur Ross
ADRIAN MORROW

WASHINGTON —  The Trump administration may tear up the North American free-trade agreement and negotiate separate deals with Canada and Mexico, President Donald Trump’s point-man on the file says.

Commerce Secretary Wilbur Ross also warned Tuesday that Washington will be “more aggressive” in fighting back against what it believes are unfair trade practices, such as by slapping tariffs on imports.

And he took aim at British Columbia Premier Christy Clark over her move to ban U.S. coal shipments from her province’s ports.

Mr. Ross laid out the administration’s trade agenda at a Council of the Americas conference at the U.S. State Department in Washington.


Despite Mr. Trump’s decision last month not to start the process of pulling the U.S. out of NAFTA – after a last-minute intervention by Prime Minister Justin Trudeau – Mr. Ross indicated a withdrawal from the deal is still on the table.

“We have not yet decided whether to go the trilateral route or whether to pursue two matching bilaterals,” he said. “And, in fact, we don’t think that’s the most important question in any event. At this early stage we’re focused on substance rather than form.”

The shape of the deal, however, is an important question to both Canada and Mexico, which want to preserve NAFTA as a three-way pact.

Canadian International Trade Minister Francois-Philippe Champagne said Tuesday that the trading relationship is not as simple as countries selling to one another. Rather, with companies depending on supply chains across the NAFTA zone, the deal allows all three nations to work together to produce products.

“We don’t just sell to each other – this is kind of a unique relationship in the world…we make things together,” he told reporters following a speech at the conference. “So clearly the three parties need to be at the table, and we’ve been very clear on that.”

If he does preserve NAFTA, Mr. Ross said, Mr. Trump told him it should be re-named “NAFFTA,” with the other “f” standing for “fair.”

Mr. Ross cited Canada’s negotiations with the European Union as an example of why multilateral trade deals don’t work. Last fall, the Wallonia region of Belgium held up the entire deal. Canada did, however, successfully close the agreement.

Mr. Ross also promised Washington will be “more aggressive in pursuing trade remedies” against other countries that the U.S. believes are cheating on trade. Rather than leaving individual companies to launch cases, Mr. Ross said, the U.S. government will instead do this itself.

“We are going to implement stricter enforcement than any recent administration,” he said.

He cited the softwood dispute as an example, and warned Ms. Clark that trying to ban U.S. coal shipments will not force Washington to back down on putting tariffs on Canadian lumber.

“If any Canadian or British Columbian official wishes to present additional information, we will consider it carefully and impartially,” he said. “But threats of retaliation are inappropriate and will not influence any final determinations. We continue to believe that a negotiated settlement is in the best interests of all the parties.”

Mr. Ross said his goal is to get countries to agree to import more U.S. products, but did not specify how this would be done. He said the U.S. did not want to start international trade battles, but wouldn’t shy away from a fight.

“We do not seek a trade war with anyone, least of all with our fellow citizens of the Americas,” he said. “We intend to raise tariffs or create non-tariff barriers only in other negotiating tools fail. But other nations must understand that we will use all the tools at our disposal if necessary.”

Mr. Ross said he hoped to get Mr. Trump’s nominee for U.S. Trade Representative, Robert Lighthizer, confirmed this week, followed swiftly by statutory notice to Congress of the administration’s intent to renegotiate NAFTA. This would trigger a 90-day countdown to the start of talks.

Mr. Champagne, for his part, told the conference Canada is working hard to diversify its trading partners – a not-so-subtle message that Ottawa has other options if the U.S.’s trade agenda proves intractable. Mr. Champagne highlighted the possibility of a free-trade deal with the Mercosur block of South American countries, as well as increased cooperation with the Pacific Alliance.

“Canada is working hard to realise an ambitious agenda of trade diversification. This includes pursuing new markets for softwood lumber,” he said. “While the U.S. will always be a natural market for Canadian exports, there are lucrative opportunities for Canadian companies around the world today.”

Arizona Senator John McCain dismissed the nationalist rhetoric coming out of the Trump administration, arguing that increased cooperation between the three countries’ manufacturing sectors has been good for the U.S.

“When you say that when parts go to Mexico and the automobile is put together in Mexico and it comes back, that’s a total loss to America – that’s a myth. That’s not true,” he said, warning that tearing up NAFTA would cost jobs in his state.

As for Canada, Mr. McCain said, he had just one complaint – that the Oilers and the Flames are more popular in his state than the local team.


“We welcome our Canadian friends to come and spent the winter with us in Arizona,” he said. “The only thing that angers me is when we have a hockey game and we play Edmonton or Calgary, there are more ... shirts from those teams than from the Arizona Coyotes.”


ADDITIONAL INFORMATION: http://www.theglobeandmail.com/news/politics/nafta-dairy-softwood-what-do-trump-and-canada-want/article33715250/

The Globe and Mail. Report on Business. Economy. Economic InsightSpecial. OPINION. May 09, 2017. Canada-China trade agreement no deal for middle class, blue collar Canadians
ANDREW JACKSON. Andrew Jackson is Adjunct Research Professor in the Institute of Political Economy at Carleton University, and senior policy adviser to the Broadbent Institute.

Global Affairs Canada is conducting public consultations on a possible Canada-China free-trade agreement. Based on the record since China joined the World Trade Organization in 2001, further liberalization of trade and investment on the current model would not benefit most Canadians.

Following the groundbreaking work of Branko Milanovic at the World Bank, economists increasingly accept that the rules of the liberal global economy have produced both winners and losers. The big winners have been the top 1 per cent around the world that have benefited from a global rise in corporate profits and senior executive incomes and, to a degree, workers in developing countries who have enjoyed rising real wages.

The big losers have been middle-skilled workers in the advanced industrial countries who have experienced job losses and wage stagnation as manufacturing production and new manufacturing investment have shifted to low-wage developing countries. Increased North-South trade, especially with China, now the workshop of the world, has exerted major downward pressures on wages and pushed surviving manufacturing operations in advanced economies to become much more capital-intensive, further squeezing employment.

Since 2000, Canada has lost 547,000 manufacturing jobs. Real hourly wages in manufacturing have grown at a much lower rate than productivity, increasing by just 6.8 per cent over the entire period from 2000 to 2016, or by less than 0.5 per cent a year. While downward competitive pressures from low-wage competition have been felt most directly and severely in the traded-goods sector, they have been more widely experienced in industrial communities and throughout the economy as the blue-collar middle-class has been hollowed out.

There is far more to this dismal story than the rise of China, notably the overvaluation of the exchange rate of the Canadian dollar against the U.S. dollar during the resource boom, and the failure of many Canadian manufacturers to restructure toward more innovative and higher value-added production on the model of Germany and Japan. But the trade deficit with China is a major factor behind the manufacturing crisis.

Canada has lost a significant share of the huge U.S. market for manufactured goods to China. Between 2002 and 2016, the China share of all United States merchandise imports rose to 21 per cent from 11 per cent, while the Canadian share fell to 13 per cent from 18 per cent, despite increased U.S. imports of Canadian energy.

We currently run a large bilateral trade deficit with China of about $44-billion in 2016. Exports amounted to $20.1-billion, overwhelmingly made up of resources and raw materials, while imports from China amounted to three times as much as exports, $64.3-billion. Our imports consist almost entirely of manufactured goods.

In principle, downward pressure on wages in the advanced industrial countries arising from trade with low-wage countries should be offset by the new opportunities created by rising wages and expanding markets in the latter. This is true to a point. As Mr. Milanovic shows, wages and living standards have risen rapidly in China and other developing countries.

However, the latest International Monetary Fund (IMF) Global Economic Outlook says that the share of wages in national income has fallen since 2000 in both developed and developing countries because of technological change, global trade patterns and the decline of unions. The labour share has mainly fallen in middle-skill jobs in advanced economy industries subject to global competition, and in sectors in developing countries such as China, which participate in global value chains. Together with the decline of unions, this has contributed to the recent marked rise in inequality in most countries.

Research by the International Labour Organization (ILO) shows that the labour share of national income in China fell to 47 per cent in 2011 from an already-low 54 per cent in 2000, as profits have risen much faster than wages. The tendency of wages to lag productivity in both the developed and developing world contributes to sluggish overall growth.

With respect to a possible Canada-China trade deal, we should challenge the artificial trade advantage China enjoys due to suppression of labour rights. This is a factor behind the low and falling wage share in that country and large trade imbalances.

As recently noted in The Globe and Mail by Ed Broadbent, China has not ratified the core international human rights provisions with respect to freedom of association and the effective recognition of the right to collective bargaining, and instead imposes government-dominated unions on workers.

A key Canadian objective should also be to bring our manufacturing trade with China into much closer balance. Given the huge imbalance that exists under current rules, this would likely require more managed trade plus much more active Canadian industrial policies. As a planned economy, China might be open to sectoral managed-trade arrangements.


When it comes to a Canada-China FTA, our economic relationship needs to be re-balanced rather than simply reinforced.

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Global Affairs Canada. May 10, 2017. Minister of Foreign Affairs to participate in Arctic Council meeting

Ottawa, Ontario - Canada is committed to the Arctic and its people. To advance this goal, the Honourable Chrystia Freeland, Minister of Foreign Affairs, announced today that she will participate in the Arctic Council Ministerial Meeting in Fairbanks, Alaska, on May 11, 2017. Indigenous Permanent Participants attending the meeting are the Arctic Athabaskan Council (AAC), the Gwich’in Council International (GCI) and the Inuit Circumpolar Council (ICC).

At the Arctic Council meetings, Canada will work to advance the following objectives with other Arctic nations:

• Supporting strong Arctic communities, including advancing the rights of Indigenous Peoples and addressing mental wellness, education, and resilience to climate change;
• Building a sustainable Arctic economy, to ensure long-lasting jobs;
• Incorporating Indigenous science and traditional knowledge into decision-making;
• Conserving Arctic biodiversity through science-based decision making.

Recent advancements include Canada’s $1.5 billion Oceans Protection Plan that will provide investments in northern coastal communities, such as making Arctic resupply operations faster, safer and more efficient. Investments of over $400 million will go to reducing communities’ reliance on diesel.

This year’s ministerial meeting is an opportunity to highlight the accomplishments of the Council over the past two years and to discuss and agree to concrete next steps for the Council as Finland takes over the Chairmanship.

While in Fairbanks, the Minister will meet with representatives of the Indigenous Permanent Participant organizations and with foreign ministers from other Arctic countries.

Quotes

“The Arctic Council is an important vehicle that supports peaceful cooperation. We are pleased to work with our neighbours and partners—the other Arctic countries and Indigenous Peoples in the Arctic—to build sustainable northern economies and take action to protect the Arctic environment for the benefit of Northerners and all Canadians.”

- Hon. Chrystia Freeland, P.C., M.P., Minister of Foreign Affairs
“Congratulations to the Arctic Council members for their leadership on improving the quality of life of northern Indigenous Peoples. We are grateful for their invaluable work with Arctic Communities to achieve lasting solutions to environmental, social and economic challenges based upon science and traditional knowledge.”

- The Honourable Carolyn Bennett, M.D., P.C., M.P.Minister of Indigenous and Northern Affairs

Quick facts

• The Arctic Council was established in Ottawa in 1996 with the Ottawa Declaration. Canada was the first Chair of the Arctic Council from 1996 to 1998 and again from 2013 to 2015. The Chair of the Council rotates among the member countries every two years.
• The Council’s member states are Canada, the Kingdom of Denmark, Finland, Iceland, Norway, the Russian Federation, Sweden, and the United States of America.
• The Arctic Energy Fund seeks to provide energy security in communities north of the 60th parallel, including Indigenous communities.
• In the Arctic, the Oceans Protection Plan will also improve the northern operations of Canada’s National Aerial Surveillance Program to increase effectiveness for detecting oil spills.
• Canada is currently co-developing a renewed Arctic Policy Framework with Northerners, Territorial and Provincial governments and First Nations, Inuit and Métis People that will replace Canada’s Northern Strategy.

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LGCJ.: