Is There Logic Behind Is There Logic Behind the Madness? the Madness? Benj amin Tal November 2016 CONFIDENTIAL
Unemployment Rate vs. Wage Increase 1 Reality Theory 12% 1 10% 1 Unemployment rate Unemployment rate 8% 1 6% 1 4% 0 2% 0 0% 0 0% 1% 2% 3% 4% 5% Wage increase 08 09 10 11 12 13 14 15 Wage increase S ource: S t at ist ics Canada, CIBC CONFIDENTIAL
Canada: S hare of Low-Paying Jobs - Rising 2 S hare of Below Average Wage Jobs 61% 60% 59% 58% 57% 56% 55% 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 S ource: S t at ist ics Canada, CIBC
Canada: Job Growth by Wage Category 3 1997-2015 2500 $'000 2000 1500 1000 500 0 <50% of avg 50-100% of avg 100-150% of avg >150% of avg wage wage wage wage S ource: S t at ist ics Canada, CIBC
Canada: Wage Growth by Wage Percentile 4 1997-2015 2010-2015 Annual Average Annual Average 4.0% 3.9% 3.5% 3.7% 3.0% 3.5% 2.5% 3.3% 2.0% 3.1% 1.5% 2.9% 1.0% 2.7% 0.5% 2.5% 0.0% P10 P20 P30 P40 P50 P60 P70 P80 P90 P10 P20 P30 P40 P50 P60 P70 P80 P90 S ource: S t at ist ics Canada, CIBC
S hale Marginal S upplier in the Medium Term 5 Production (mn bbl/ d) Cdn Oil S ands 120 Global Oil Demand 2018 100 80 60 40 North American S hale 20 Middle East 0 20 40 60 80 100 $/ bbl S ource: BP, CIBC
Canadian Economy: It’s Not All Oil 6 25% Proportion of Exports (Pre-Commodity Price S lump) 20% Australia Canada 15% 10% 5% 0% Precious Vehicles Iron Ore Machinery Coal Crude Oil Metals S ource: S t at ist ics Canada, ABS , CIBC
Canadian Exports Have Underperformed Model Prediction (L) 7 US Has Outperformed in Capital-Intensive Manufacturing (R) Export Volumes 115 Capital Intensive Trend Expected After 20% Currency 120 Manufacturing Production Depreciation 110 110 100 105 90 80 Index 100 70 2006 2008 2010 2012 2014 Canada US 95 Jan-15 Mar-15 May-15 Jul-15 ep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 S S ource: US BEA, CIBC
Mexico Has Also Gained Market S hare (L) 8 Cdn Plants Near Full Capacity; Investment Needed to Lift Exports(R) 25% 90 Cdn Manufacturing Proportion of US Goods Imports Capacity Use (% ) 20% 85 15% Canada 80 Mexico 10% 75 Avg Last Expansion 5% 70 65 0% 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 Mar-00 Nov-02 Jul-05 Mar-08 Nov-10 Jul-13 Mar-16 S ource: BEA, S t at ist ics Canada, CIBC
US Inventories Trend Higher in Key Areas for Canadian Exporters 9 Business Inventory-to-S hipment Ratio 2.2 (Retail, Wholesale and Manf.) 2.0 Auto, Machinery + Chemical 1.8 Other S ectors 1.6 1.4 1.2 1.0 Jan-00 Apr-01 Jul-02 Oct-03 Jan-05 Apr-06 Jul-07 Oct-08 Jan-10 Apr-11 Jul-12 Oct-13 Jan-15 Apr-16 S ource: BEA, CIBC
Has The Bank of Canada S et the Goalposts? 10 US DCAD “ exports… are weaker… “ We actively discussed “ The C$ has strengthened (with) higher oil prices...their net effect in part because of… the the possibility of higher C$” adding more monetary will need to be assessed” 1.10 stimulus” 1.20 1.30 “ the C$ has declined significantly… 1.40 A further rapid depreciation… might influence inflation expectations.” 1.50 Jan-15 Mar-15 May-15 Jul-15 ep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 ep-16 Nov-16 S S S ource: CIBC, Bloomberg
How C$ Depreciates Even as Oil Prices Rise (Change vs. Late 11 August 2016) Change in C$ Expected by Year-End 2017 (cents-US ) 4 2 0 -2 -4 -6 -8 -10 75bp Increase $8/ bbl Total Change in US O/ N increase in Rates vs Cda WTI S ource: Bloomberg, CIBC 26
Fiscal S timulus Kicks Up a Gear in H2 2016, Leaving BoC On S idelines 12 % -pt Lift to YoY HH Disposable Income Growth 0.8 0.6 0.4 0.2 0.0 -0.2 Q1-16 Q2-16 Q3-16 Q4-16 Q1-17 Q2-17 Q3-17 Q4-17 Q1-18 Tax Changes Child Care Benefit S ource: Depart ment of Finance, CIBC
Liberal Additions to Infrastructure Rise in 2017/ 18 (L) 13 Infrastructure Bank Multiplying Federal Dollars (R) S ocial, Transit, Green & Trade Infrastructure Bank Capital Infrastructure (C$ bn) C$ bn 35 7 30 6 25 5 20 4 15 3 10 2 5 1 0 0 Gov't Cda Non-public Inv Total '16/ 17 '17/ 18 '18/ 19 '19/ 20 '20/ 21 '21/ 22 S ource: Finance Canada, CIBC
Provincial Forecast: Dealing With New Realities 14 Real GDP Y / Y % Chg 2 0 1 4 A 2 0 1 5 A 2 0 1 6 F 2 0 1 7 F 2 0 1 8 F BC 3.3 3.3 2.6 2.1 2.2 Alta 5.0 -3.6 -2.2 1.7 1.3 Sask 2.4 -1.3 -0.7 1.8 1.4 Man 1.5 2.2 1.6 1.7 1.8 Ont 2.7 2.5 2.5 2.1 2.3 Qué 1.3 1.2 1.5 1.5 1.6 NB -0.1 2.3 0.4 0.7 1.0 NS 0.8 1.0 1.3 1.1 1.1 PEI 1.5 1.3 0.8 0.7 1.0 N&L -1.0 -2.0 0.2 -3.8 -1.7 Canada 2 .5 1 .1 1 .2 1 .7 1 .9 S ource: S t at ist ics Canada, CIBC
Total Inheritance 15 800 ($bn) 700 600 500 400 300 200 100 0 2006-2015E 2016-2025P S ource: S t at ist ics Canada, CIBC, CIBC Inherit ance S urvey, 2016 (age group 50-75, past 10 yrs, inflat ion adj ust ed)
China: S till Overly Reliant on Capital S pending (L), 16 Rotation to Consumer Not Y et Happening (R) Per-Capita GDP Capital S pending Proportion GDP 25 % Yr/ Yr (Inter. $'s) vs Per-Capita GDP Business Investment 90000 20 Retail S ales 80000 70000 15 60000 50000 10 40000 China 30000 5 20000 10000 0 0 Dec-12 Jul-13 Feb-14 ep-14 Apr-15 Nov-15 Jun-16 10 20 30 40 50 S Capital S p. as % GDP
Growth in China’s Money S upply – Exploding 17 S ource: Bloomberg, CIBC
New Federal Mortgage Rules 18 1. Standardized stress test for all high-ratio insured mortgages –Effective October 17, 2016 (MANDATORY) • All insured homebuyers must qualify for mortgage insurance at an interest rate the greater of their contract mortgage rate or the Bank of Canada’ s conventional five-year fixed posted rate. That is, expand the existing Bank of Canada MQR to apply to all high-ratio mortgage terms, regardless of length • Already applicable for high-ratio insured mortgages with variable rates or fixed rates with terms less than five years • Currently, ~15% of new originations are high-ratio insured mortgages 2. Changes to eligibility for portfolio insurance - Effective November 30, 2016 • To be eligible for portfolio insurance, newly insured low-ratio mortgages must meet the eligibility criteria that previously only applied to high-ratio insured mortgages: NEW Maximum amortization of 25 years o NEW Maximum home purchase price of $1MM o Adherence to TDS R/ GDS R of 44% / 39% as NEW determined by above standardized stress test to all mortgage terms o NEW Loan purpose includes the purchase of a property or subsequent renewal of such a loan o A minimum credit score of 600 at the time the loan is approved o NEW Property will be owner-occupied (NB: CIBC already excludes rentals) o For variable-rate loans that allow fluctuations in the amortizat ion period, loan payments that are recalculated at least once o every five years to conform to the original amortization schedule (NB: CIBC already recalculates) 3. Policy Review on shared risk loss • The Department of Finance will lead a consultation in the Fall to discuss benefits/ drawbacks on shared risk loss with lenders 4. Tax exemption • An individual who was not resident in Canada in the year the individual acquired a residence will not be able to claim the exemption for that year
Impact of Recent Mortgage Policy Changes 19 • The primary residence capital gains exemption and BC tax should have an impact, but may not deal with “ satellite” activity where kids live here, parent abroad. • Higher qualifying rates and measures on low-ratio insurance will hit pricing and volume growth from non-bank, monoline lenders. • Broker market share— currently at 30% of originations —will go down. • Mortgage originations will slow down for the market as a whole by an estimated 5% -10% . • Growth in overall mortgage outstanding will decelerate by 2.5 percentage points (growth cut in half). Near/ sub-prime/ MICs activity will rise. • Demand for rental units will rise— leading to increased investors’ activity in the condo market and some acceleration in purpose-built activity.
Housing: Be Careful What Y ou Wish For 20 Real GDP (2015 % Year/ Year) 3.5 Housing (Real Est. + Res. Const.) 3.0 Other 2.5 2.0 1.5 1.0 0.5 0.0 Ontario BC
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