Mortgage Watch

In a soon-to-be-published database that looks at how Canadians handled their wealth during the rapid change of fortunes that marred 2008, Analytics exposes profound changes in the way people approach their wealth.

Canadians have seen their nest eggs shrivel, beefed up their savings, scaled back their borrowing, and embraced caution, an abrupt change in attitude that will likely persist, says Catherine Pearson, vice-president of Analytics in Toronto.

Generally, the research, which crunches and dissects numbers from 80 different sources and goes into deep local detail, found that the richer Canadians were, the harder they fell.

"The more money you have, the more you have to lose," Ms. Pearson said.

In Calgary, net worth fell as the value of household investments plunged and debt climbed.

In Vancouver, though, consumers saved more and real estate fared better last year.

Net worth, which measures someone's assets minus debts, dropped 6.2 per cent for Canadians as a whole last year. But Calgary residents saw their wealth plunge 12.3 per cent, while Vancouver's residents were able to hang on to much of their riches. There, net worth fell just 3.1 per cent between December, 2007, and December, 2008.

Now Vancouver's residents have taken first place for household net worth, while Calgary has fallen to second place.

Vancouverite Sebastian Albrecht rode that Pacific wave. He has a lot of his money tied up in real estate. And it's these investments - with prices down less than 10 per cent from their peak last year - that has made the city surrounded by mountains and ocean the richest in Canada, supplanting the country's energy capital Calgary.

Mr. Albrecht bought his first condo a decade ago, after university. He stretched himself - and slept in a sleeping bag on the floor for a couple months in the unfurnished home.

A decade later, he lives in a $600,000 home that he bought two years ago for $500,000 and also owns - and rents out - a $350,000 town home and a $300,000 condo. He has some money in stocks, but only about 10 per cent of his net worth.

Born in the city, an entrepreneur at heart, the 34-year-old worked in IT and then started a clothing import-export business and dabbled in real estate - until he became a realtor himself three years ago, a perch from which he sees a cross-section of Vancouver and the people who generate the city's wealth. From movie makers to junior mining players, it is a diffuse mix.

"The difference in Vancouver is it's more diverse than a lot of areas in Canada," Mr. Albrecht says. "Calgary has oil. Toronto is finance. Here, there's a lot of creativity. I'm amazed how some people make money here."

Vancouver's net worth per household is an average of $575,826, while Calgary's is $569,926, the research shows.

Compare that with Newfoundland, where household net worth is typically $140,706, or even to Ontario, where average household wealth is $354,968.

Most of Calgary's losses stemmed from a plunge in the value of investments held by households, such as stocks, bonds and mutual funds. At the same time, Calgarians took on large liabilities in the past year, and Calgary is now the home of the most heavily indebted people in Canada. Albertans in general have 30 per cent more consumer debt than the average Canadian, the research shows. And the mortgage debt of many young people has soared.

"Perhaps they simply haven't realized the fact that the heady boom days are now over," the researchers said in their analysis.

Vancouver residents, on the other hand, were able to mitigate their exposure to the ravages of the recession by increasing savings, and by benefiting from more stability in the housing market in 2008.

The survey doesn't cover 2009. In the first six months of this year, prices for existing homes were down 8.6 per cent in Vancouver from the same period of last year, and 9.8 per cent in Calgary, resale statistics show.

Perhaps because they're less wounded than the rest of the country, British Columbians are piling back into the stock market faster than elsewhere.

But people in Quebec and Ontario are gun-shy, and are stashing away any extra money they have in safe places. Quebec households in particular have low credit card debt, and boosted their holdings of sure-thing guaranteed investment certificates by 5 per cent over the course of the year. Deposits in banks and credit unions have risen 4.9 per cent.

People in Ontario, where the recession has hit hardest, increased their term deposits by 15.3 per cent and increased their debt loads by just 3.0 per cent - much less than the national average increase of 8.1 per cent.

"Hats off to Ontario households for being fiscally responsible," the researchers said.

Still, Ontarians were paying dearly for such debt. Residents were using 7.1 per cent of their disposable income to pay interest charges - 20-per-cent higher than the national average of 6.3 per cent. In Alberta, servicing non-mortgage debt ate up just 6.1 per cent of discretionary income, despite the rising debt loads.

Indeed, Albertans' discretionary income was higher than anywhere else in the country, at $53,237 per household. That was 29-per-cent higher than second-place Ontario.

The oil-rich province may have been hammered by the global recession, but households still have plenty of wealth. "Alberta's got the spending power," the researchers conclude.

Sales rose 8.7 percent to 41,304 homes from the previous month on a seasonally adjusted basis, the Canadian Real Estate Association said today in a statement from Ottawa. Average home prices rose 3.6 percent from a year earlier and the inventory of unsold homes fell to its lowest since August 2007.

Recent data on Canada’s housing market suggest the Bank of Canada’s efforts to stimulate spending with interest rate cuts are helping fuel demand for homes and may be reversing a slump in home construction. The Bank of Canada, which forecast that housing will shed 1.1 percentage points from growth in 2009, has cut its benchmark lending rate to a record 0.25 percent.

“Obviously there is one segment of society that doesn’t believe this will be a lengthy downturn,” said Doug Porter, deputy chief economist with BMO Capital Markets in Toronto.

New home sales jumped a record 32 percent during the second quarter to 114,173 units, the realtor group said. The number of months needed to sell current inventories fell to 4.2 in June, the lowest level in more than two years.

Agents and Brokers

Output of real estate agents and brokers was up 8.2 percent in April, Statistics Canada said June 30. Canada Mortgage and Housing Corp. said July 9 that new home construction rose for a second month in June, while the total value of permits issued by municipalities jumped 15 percent in May.

One explanation for the pick-up in the real estate market, Porter said, may be that the decline earlier this year was “extreme” and created pent-up demand for homes. Existing home sales fell in January to their lowest since 2000.

“I can’t help but wonder whether these gains are sustainable,” Porter said.

The country also may be benefiting from a financial system that has largely escaped bad-asset problems plaguing other countries.

“The positive impact of low interest rates on mortgage demand is clearly much more powerful in Canada than in the U.S.,” Derek Holt, an economist at Scotia Capital in Toronto, said in a note to investors.

That the Australian banks have a stable ratings outlook is an unadulterated positive for investors, and should be a matter of national pride commensurate with the charms of the Great Barrier Reef and consecutive appearances in the World Cup.

Two years ago there were more than 50 banks around the globe with AA credit ratings, but now there are just nine:

ANZ (AA)

Commonwealth (AA)

National Australia Bank (AA)

Westpac (AA)

Bank of Nova Scotia (AA-)

DBS Bank (AA-)

Nordea Bank (AA-)

Royal Bank of Canada (AA-)

Toronto-Dominion Bank (AA-)

Overseas investors have questioned why the Australian banks have retained their strong ratings through the credit crisis while bigger global players have been downgraded.

The Australian banks' stable outlook has come about through a mixture of good management and regulation, and what the ratings agency refers to as a "less fiercely competitive environment" than in some overseas markets, which has meant less risky lending practices.

A rating of AA and a stable outlook for that rating means the big banks can raise money in overseas capital markets at relatively attractive rates and are among the first to raise funds without the help of the costly Government guarantee.

This is a good thing when, according to the Reserve Bank, they are reliant on offshore wholesale sources for about 80 per cent of their long-term funding, a disproportionate level when compared with most of their overseas peers.

These are no small numbers. In the first six months of this year, industry publication DCM Review estimates Australian banks raised about $64 billion in overseas capital markets, putting them well on the way to eclipsing last year's record offshore issuance.

If home prices hold up and our economy stays out of recession, it will be due to two key factors: the willingness of the Chinese to buy our natural resources and the credit intermediation powers of our Big Four banks.

But nothing can be taken for granted.

Standard & Poor's warns that it would have to review its position if bad debt charges increased materially or stress re-emerges in wholesale funding markets.

Indeed, a few weeks earlier it downgraded the prospects for more than 20 mostly small US banks but also including big mortgage bank Wells Fargo.

Many of the comments that accompanied the notice of the downgrade could be applied to the Australian banks if you shut one eye. For instance, the agency said that the downgrades reflected its belief that "operating conditions for the industry will become less favourable than they were in the past … and (incur) tighter regulatory supervision".

The other major ratings house, Moody's, already describes the outlook for the big Australian banks as negative, saying business asset quality is likely to be the most important near-term driver of ratings.

Crucially, the prospects of all the major banks holding their ratings are not homogeneous.

In other words, it is quite possible that one of the big banks could have a downgrade while the others hang on to their rating. Share investors need to be aware of this and seek advice about which bank is the most at risk over the longer term.

Having to operate under a single A credit rating could cost a major bank about $200 million in extra annual funding costs.

S&P says that while the Big Four banks are similar in many ways, the impact of market developments on individual banks will be assessed case by case. Ratings could be lowered in the event of mergers and acquisitions, a bank pursuing a riskier business model or adverse investor sentiment.

It also notes that some banks have been more prone to one-off events, suggesting potential differences in risk management and culture (it does not include examples).

The banks are working hard to ensure they are not delivered any nasty credit rating surprises. For instance, NAB in its May interim results presentation cited the maintenance of its AA credit rating as one of its eight priorities in navigating a recession.

In S&P's eyes, NAB's British exposure means that it has a moderately higher credit risk than its peers in the shorter term, but over the longer term this exposure should be a source of diversity and growth.