“It was the Best of Times, it was the Worst of Times”
The Loan Loss Provisions of Canada’s eight largest lenders now exceeds $15 Billion and escalating.
This bewildering fact has happened during what most would concede has been “the best of times”. Just consider the following: land and home prices have skyrocketed for nearly 2 decades; consumers have benefited from historically low interest rates; unemployment is < 6%; Canada attracts > 300,000 new citizens annually, many of whom are skilled professionals demonstrating a strong propensity to purchase properties with a down payment > 25%; and standard subdivision homes were escalating at 5% a month through parts of 2016 and 2017. This inevitably causes one to wonder where all of this equity went.
What is causing this conundrum, now that Canadian lenders are rapidly stock piling such loan loss reserves? Could it be they are reacting to the Big Short being placed against them by large institutional investors? Have they succumbed to the reasoning that Canadians being 180% in debt is highly problematic?
Please note, many property-oriented actuaries have, for half of a decade, been highlighting that the endemic math associated with home-ownership was negatively skewed. It is now estimated that 1 in 5 new homeowners now find themselves in a negative equity position. Could the ubiquity of poorly conducted appraisal work explain this phenomena?
Possibly, the banks are just being prudent and preparing for that unforeseen rainy day, when interest rates begin to rise. Perhaps, it is the innate knowledge that Millennials are forfeiting the lifestyle of their parents. Alternatively, this younger generation could be preparing for the next foretold “black swan” event, as it seems unforeseen tragedies strike every half-century. For example, the bubonic plague, Spanish flu epidemic, small pox epidemic, the world wars, the stock market crash in 1929 that evidently led to the depression, 9/11, etc. Just last week, China expanded its quarantine to 35 million people in response to the Coronavirus. These calamities often result in massive civic unrest, restricted global arbitrage, and a notable devaluation in asset values, which nonetheless would spark pro-active behaviours in terms of reserving funds.
Keep in mind, “the future depends on what you do today”.
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If these ideas resonate, please feel free to contact any of our knowledgeable professionals; we would be happy to discuss with you!