[deMolay]

By KONRAD YAKABUSKI , VIRGINIA GALT and GREG KEENAN AND NORVAL SCOTT

From Saturday's Globe and Mail

Konrad Yakabuski: E-mail | Read Bio | Latest Columns
October 4, 2008 at 1:37 AM EDT

MONTREAL, TORONTO AND CALGARY — Rick Lafleur is walking away from his home in Windsor, Ont., unable to renew his mortgage. Customers won't even talk to Newfoundland manufacturer Lorne Janes as their lenders tighten the screws. New Brunswick Finance Minister Victor Boudreau fears a budget deficit may be inevitable as a collapsing stock market whacks government pension funds and the province's export-driven economy falters further.

Across the country, even in the seemingly unsinkable resource towns of the Prairies, the grim prospect of a U.S.-led global recession and credit crunch has exited the abstract realm of the financial markets and landed with a thud on the kitchen tables of average Canadians.

In most parts of the country, house prices are flat or falling – they were down 6 per cent in the city of Toronto in September over the previous year – and down with them is the net worth of millions of debt-loaded consumers. They are in poor financial shape to weather an economic downturn that is already forcing some financial institutions to review the creditworthiness of existing borrowers.

Central Canada's manufacturing sector, already reeling from about 400,000 job losses since 2003, is bracing for an even bloodier downturn than was expected only a few weeks ago. But it is hardly alone in its misery, as evidence mounted this week that the commodity price boom that has fuelled some provincial economies and filled government coffers is out of gas.

How bad it all gets depends largely on whether the $700-billion (U.S.) bailout package passed Friday by the U.S. Congress – which aims to take bad mortgage-related loans off bank balance sheets – meets its goal of getting financial institutions to start lending again. The deep integration of global financial markets – and particularly of Canadian and U.S. ones – means that it's not just the fate of the American economy, which lost 159,000 jobs last month, that hangs in the balance.

“Canadian banks are borrowing and lending in the same credit markets as U.S. banks, so if the credit markets seize up in the U.S., they're going to seize up in Canada, too,” McGill University economics professor Christopher Ragan explained.

Lender skittishness is a major worry for the Bank of Canada, which Friday massively boosted the amount of cash it plans to make available to the financial system to $20-billion from $8-billion, in a bid to unclog frozen money markets.

Still, there are no guarantees that its actions, along with similar moves by central banks around the world, will be enough to avert a protracted credit crunch. That would exacerbate the economic slowdown that had already been threatening Canadian jobs, Prof. Ragan added. “It will mean that the recession will be deeper. And any extension of a U.S. downturn is just an extension of the amount of time they're not buying Canadian wood and Canadian car parts.”

It's already too late for Mr. Lafleur, in Windsor, where auto-sector job losses pushed the unemployment rate to the highest of any Canadian city at 9.6 per cent in August. Although he and his wife have both found new jobs after losing their last ones at a Chrysler car dealership and General Motors plant, respectively, their house is now worth less than the mortgage on it.

Mr. Lafleur's lender, Xceed Mortgage Corp., has tightened its credit conditions and recently told Mr. Lafleur it would not renew the $155,000 mortgage on his modest 50-year-old bungalow because the property is now worth about 25 per cent less than that amount.

“I'm being told, no, they're not going to renew, because they are pulling out of Ontario and, secondly, because the loan-to-value was out of sync … because of the economy and Windsor is pretty bad,” Mr. Lafleur said.

It's a big switch from a few years ago when lenders were falling over themselves to offer a mortgage to almost any homeowner or buyer who asked for one. Indeed, Mr. Lafleur was not required to retain any equity in his property when he remortgaged it five years ago.

“I was getting married and I needed 100-per-cent financing. They said fine, no problem. Got the mortgage,” Mr. Lafleur said.

Xceed, meantime, has problems of its own and has tightened its credit after being caught up in the subprime mortgage crisis that has convulsed the United States housing market. Xceed and a handful of subprime mortgage lenders in Canada had used asset-backed commercial paper to fund their mortgage portfolios. Then the bottom fell out of the ABCP market, which is now being restructured.

“Xceed had to change its business model to where it no longer underwrites mortgages that do not qualify for the Canada Mortgage and Housing Corp. [insurance],” Xceed spokesman Richard Wertheim said.

In June, Finance Minster Jim Flaherty tightened the criteria for mortgage insurance provided by government-owned CMHC, requiring buyers to provide a down payment of at least 5 per cent. He also made the CMHC stop insuring mortgages amortized over a period of more than 35 years, in effect killing the budding 40-year mortgage market that had been popular with first-time buyers seeking to keep their monthly payments to a minimum. Both moves were aimed at preventing the kind of housing bubble that has now burst south of the border, but they may have come too late to prevent a similar rash of mortgage defaults in Canada.

Many homeowners who got mortgages under the laxer rules that existed a few years ago could find themselves in trouble at renewal time. If they have not improved their financial situations to the point where they would qualify for a more traditional mortgage, Xceed for one is turning them down, Mr. Wertheim said.

Times aren't just getting tougher for homeowners. Home builders face bleaker prospects, too. Across Canada, jobs in the construction sector have accounted for virtually all – 99.4 per cent – of total employment growth so far this year, according to Statistics Canada data. One in 12 Canadians is now directly employed in the sector, the largest share on record.

Residential activity, which constitutes about half of the total construction market, is already cooling after a decade of growth. Now, limited access to credit is threatening to curb the start of big new infrastructure and commercial projects.

Financing “at this point in time will be very tough, so they will definitely be impacted,” said Michael Clifford, Canadian tax leader for engineering and construction at PricewaterhouseCoopers. “The banks are being cautious, so the whole scenario leads to people waiting and seeing.”

For Canadian manufacturers, the credit crisis is the third stage of a triple whammy. They have already been battered by the surge in the value of the Canadian dollar and the spike in prices of such key commodities as steel and plastic.

Companies are hunkering down, scrapping expansion projects and cutting employees. The decline in the prices of some of Canada's key commodities, such as oil and fertilizer, could help ease their pain, since it has sent the Canadian dollar lower. But that might not matter much as a U.S. recession erodes demand for Canadian manufactured goods.

Mr. Janes, president of Newfoundland-based Continental Marble of Canada, is already getting the cold shoulder from his customers in Florida, Maryland and California. “The reply I'm getting now is, ‘Lorne, save the phone call, don't call any more until this sorts out,'” said Mr. Janes, whose 12-employee company manufactures equipment to produce moulded stone countertops.

Across the country in Annaheim, Sask., Gurcan Kocdag has been feeling the pinch for more than a year. The U.S. downturn – new housing starts have fizzled – means fewer lumber trucks heading south, slowing demand for the trailers Mr. Kocdag's Doepker Industries makes. The 60-year-old company has already cut the work force at its three Saskatchewan plants by about 200 people to 325 in the past year.

“It's not just manufacturers,” Mr. Kocdag said. “Everybody who supplies services to the transportation industry – our customers, our customers' customers, their customers. Everybody in the value chain is significantly affected.”

Falling commodity prices – which have helped knock about 25 per cent off the Toronto Stock Exchange's benchmark index from its summer peak – have not yet eroded the confidence of Saskatchewan Premier Brad Wall. After all, despite dropping 50 per cent from its summer peak of $147, oil is still trading higher than it was a year ago.

“We are not going to be immune to what's happening around the world,” Mr. Wall said. “But even with the drop in oil, it brings it down to $94. Our government was only elected less than a year ago and it wasn't over $90.”

Across the border in Alberta, however, there are concerns that the U.S. downturn will be so severe that oil prices will fall further still. Together with spiralling costs for oil sands projects, it could make any new developments economically questionable, capping the province's boom.

The consortium behind the giant Fort Hills oil sands project revealed last month that its development costs had grown by more than 50 per cent in little more than a year. With the credit crunch, investors have assumed it will be hard for UTS Energy Corp., a junior partner in the consortium, to raise the cash to fund its 20-per-cent stake. The company's stock has dive-bombed to just over $1 from $6 a share in June.

But while some oil sands projects may be delayed or pulled, that would only slow the breakneck pace of Alberta's oil boom, rather than stop it. Companies plan their multibillion-dollar investments on long-term price projections that still support development.

The short-term picture looks bleaker for Alberta's natural gas sector. While larger companies – flush with cash from 2008's previously sky-high prices – say they'll be unaffected by any downturn, junior firms, which rely on raising funds through debt and equity, won't be able to easily find the cash they need to grow.

“Junior companies will not be able to get the cash to do drilling this year,” said Roger Soucy, president of the Petroleum Services Association of Canada. “At best, the forecast [for drilling next year] is flat, and it could drop.”

With neighbours losing homes or jobs, even consumers not directly affected by a downturn are likely to be rattled by what's happening around them.

“It's more likely than not that consumers are going to be more anxious, more concerned and less likely to spend going into the Christmas season,” said Kyle Murray, director of the school of retailing at the University of Alberta. “And if consumers, en masse, just hold off on buying those things like cars and houses, that also has a real negative impact on the economy in the short term. So none of that really bodes well.”

It all means finance ministers across the country will likely be facing lower revenues from income and sales taxes, while expenditures on unemployment and welfare benefits could balloon. That could push many governments – including Ottawa, which had a relatively slim $2.9-billion surplus in the first four months of the fiscal year – into the red.

“A deficit is something that's certainly in the cards right now [for New Brunswick],” Mr. Boudreau said in an interview Friday.

In its March budget, the government projected a tiny $19-million surplus, on spending of $7.2-billion, “so there's not a whole lot of cushion” if the economy slips into recession, he added. On top of that, government pension funds have been sideswiped by sliding stock prices, forcing the province to top up shortfalls with its own cash.

Each of the federal party leaders has insisted that he or she would not run a deficit if elected on Oct. 14, despite pledges of billions in new spending. But Prof. Ragan thinks their “no-deficit religion” is wrong-headed.

“The last thing you would want when the economy slows down is to intentionally raise taxes or cut spending just to stay out of a deficit,” he said. “It's bad economics and I suspect [the party leaders] know it.”

Ottawa's budget deficit exploded to $41-billion in 1992-93, in the wake of the last big recession, up from $28-billion in 1989-90. But subsequent moves to eliminate the deficit and pay down the federal debt – which now represents about 30 per cent of gross domestic product, down from a peak of 70 per cent – means Ottawa has room to prime the pump.

“One of the reasons it was so important to bring down the deficit and debt was so that in bad times you would have a little bit of fiscal room to manoeuvre,” Prof. Ragan said. “Well, the rainy day has arrived.”

With a report from Tavia Grant in Toronto

[DaleFromCalgary]

The Panic of 2008 hasn't hit Alberta too hard, but house prices have plateaued and are trending slightly downward because all the speculators who bought condos are rushing to unload at the same time. We didn't have the sub-prime crisis the Americans did but the housing market is overbuilt. Too many small-time operators bought condos or new houses pre-build, thinking they would make a killing when the units were completed.

7-Eleven is still having trouble hiring in Calgary, and is paying $11/hr plus benefits plus retention bonus. School bus companies are so desperate for drivers that the school boards are assisting them in a major advertising campaign.

So far the price of oil still hasn't dropped back to what it was a year ago.

I paid off my mortgage in 1997 and stayed out debt since. I know too many people who said this time is different and traded up to a bigger house instead of paying off their mortgage. In both Canada and the USA, people made the false assumption that it is a constitutional right to buy a house with nothing down instead of renting until you can afford it. And if you can't save the down payment, you have no business owning a home. Now the time has come to pay the piper.

[Cashmere]

The entire premise of the article is false.

That wonderful Canuckistani patriot Nickel has assured me that Canada's economy is not dependent on the U.S. economy. Oh Young Nickel! She has clearly explained in several other threads that Canada is entirely separate and independent from the Empire, and would be virtually unaffected by the Empire's collapse.



Clearly this is a fabricated Onion.com article.


O Canuckistan!
Our home and native land!
True patriot [Nickel] love in all thy sons command!

[Cashmere]

The Panic of 2008 hasn't hit Alberta too hard,

Do you live in Alberta?

[nobodypanic]

The entire premise of the article is false.

That wonderful Canuckistani patriot Nickel has assured me that Canada's economy is not dependent on the U.S. economy. Oh Young Nickel! She has clearly explained in several other threads that Canada is entirely separate and independent from the Empire, and would be virtually unaffected by the Empire's collapse.



Clearly this is a fabricated Onion.com article.


O Canuckistan!
Our home and native land!
True patriot [Nickel] love in all thy sons command!

stop damn you! you're killing me here. i just sprayed my computer with a mouthful of pepsi.

[Armageddon]

Just keep sending your natural gas south and everything will be ok.


Sincerely,
George W. Bush

[deMolay]

Nice Hooters by George. Yes Cas another smug Canadian just got served up a plate of hot steaming cat shit. The Bank of Canada has had the Bailing Pumps on "The Slave Ship Canada" pumping Billions all week into the system in Canada. Because of the credit seizure. Canadian Banks fish in the same waters as American Banks. And it is fished out.

[DaleFromCalgary]

Cashmere asked "Do you live in Alberta?"

Unless Saskatchewan annexed us last night, Calgary is still in Alberta.

The auto workers in Windsor are sweating but Alberta is still doing okay. Bear in mind that Canada's manufacturing industry is in southern Ontario and Quebec, and they are tied too closely to the USA to escape collateral damage. The GLOBE AND MAIL newspaper is a Toronto newspaper, so their viewpoint is skewed.

From the GLOBE article "But while some oil sands projects may be delayed or pulled, that would only slow the breakneck pace of Alberta's oil boom, rather than stop it."

We Albertans would actually welcome a slowdown. As discussed frequently on theoildrum.com, one problem with peak oil is that new megaprojects have runaway construction costs. This sets off a chain reaction; if you have a leaky toilet in the house it may be days before you can book a plumber. While it is nice to live in an economy where 7-Eleven is desperate for workers, it also means that poor service from every store or business in Calgary is the norm because they are short-staffed or constantly training new clerks.

[Cid_Yama]

<b>Blame Canada!</b>

http://uk.youtube.com/watch?v=LK_1tKaIr ... re=related

Sheesh.

http://uk.youtube.com/watch?v=PG-CFJ74X1o

[drgoodword]

That wonderful Canuckistani patriot Nickel has assured me that Canada's economy is not dependent on the U.S. economy. Oh Young Nickel! She has clearly explained in several other threads that Canada is entirely separate and independent from the Empire, and would be virtually unaffected by the Empire's collapse.

Just for the record, not all Canuckistani patriots think peak oil and the encroaching Kondratieff winter will politely bypass the land of the maple leaf.

I've been telling family and friends for three years that the U.S. housing market is going to crash in an unprecedentedly loud way and take down the rest of the world economy with it, including safe-as-houses Canada. I'll never forget a house dinner party I attended in January 2006 where I was discussing the reasoning for my prediction of the housing crashing and ensusing global financial catastrophe, when an old friend who had recently become a financial planner (for a major financial company that makes its profits from the mutual funds they push on their clients--so he's really one step removed from a real estate agent) practically screamed at me from the other end of the table that the American housing market will not crash! Needless to say, even this screaming pollyanna has become more subdued about our ecnomic prospects lately.

[Snowrunner]

Just keep in mind. According to Harper the economy is fine, and he has a "plan", although he cannot (yet?) tell us what it is.

Meanwhile all the other parties are just trying to scare people by drawing up economic plans.

So I am with Cashmere, if our esteemed Leader Harper is saying that then the G&M must have copied something from the Onion.

[DaleFromCalgary]

"the encroaching Kondratieff winter"

Funny you should mention him as I was just thinking the other day that we are due for a Kondratieff nadir. The Kondratieff long wave operates in an approximately 50-60 year cycle, sometimes referred to as a two-generation economic cycle. The last nadir ended in 1939 so we are slightly overdue to hit bottom on the current wave.

I leave it to someone better schooled in economics than I am to tie in peak oil with Kondratieff long waves; that would be an interesting study.

[Blacksmith]

Nice article deMolay, well researched. I believe we are just scraping the surface, more to come, bailout aside.

[Maddog78]

I expect this mess to hit B.C. hard.
Our real estate is so out of whack compared to people's average incomes that I suspect it will crash harder here than anywhere else in Canada.
So many people out here preach the "can't go wrong buying real estate" gospel.
I knew this to be crap since my experiences in Alberta mid 80's when RE tanked.
I tried to tell people out here for yrs. now, be careful because yes you can lose your ass in RE but most laughed at me.
Most thought the 2010 Winter Olympics would keep things on the boil till they were done but that is delusional.
The specuvestors are running for the hills now.

Check out these listings and sales charts.
The crash will be a hard one.







Some are even trying to burn their way out.

Condo fire. Suspicous? Bwahahaa, of course!

[Cashmere]

Dr. Good - nice post - thanks for the input.

Dale - excuse my ignorance regarding Canada's geography - I never took a Geog course and I'm too lazy to learn what people around the world are currently calling their plots of land.

The reason I asked Dale is that I take self-reviews with a grain of salt. Not that I dismiss them, but always with a grain of salt - most people don't want to admit that their Great Home and Native Land is in trouble.

I find the worst to be the Northern Europeans. They seem to be almost uniformly delusional that Norway/Netherlands/Sweden will rise above the brewing storm.

Regarding Alberta, I have no information.

Regarding Canada as a whole - I place my greatest trust with DeMolay.

When I hear one Patriot yelling that things are great and we're great and you suck, and I hear the other one calmly noting that - regardless of whether you suck, we're in deep crap up here - I tend to place a lot more faith in the latter opinion -

Patriotism is like being a Walmart worker - virtually any fool qualifies to be one.

Brutal self-assessment, however, is the plaything of mental kings alone.

So when DeMolay posts - I read very carefully.

[Cashmere]

stop damn you! you're killing me here. i just sprayed my computer with a mouthful of pepsi.

Pepsi is so much better than Coke. Coke lost when they stopped using glass bottles.

How the hell old am I?

In any case, stop drinking that crap!!

1. Straight sugar.
2. High acid will rot your teeth.
3. Diet has high phosphorus which may make your bones weak.
4. Expensive!

[Cid_Yama]

They stopped using glass bottles? All of them or just the 6 oz ones?

[deMolay]

Cas I am no prophet by any means. But I am aware that for about 100 years now, the political parties in Canada have used the US boogie man to scare weak minded people who can't figure out their own paycheques into voting for them. And it has become ingrained in the Canadian mind, that anything US is Bad Socialism/Communism is good. I also remember Liberal PM Lester Pearson, at the height of the anti-US move in the early 60's doing a study with Walter Gordon Canadian Finance Minister into the effects of ending all trade with the USA. The result of the lengthy study was that without US trade and finance into Canada. Our economy and lifestyle in Canada would drop back to what it had been by 40 years. The Liberals shelved the report quietly. Canadians do not understand how closely linked we are to the USA. Culturally, and financially. It was American investment that created the oil industry in Alberta. Now that being said, many many Albertans, and I suspect Dale amongst them, are borderline or semi-separatist. Federal Policies towards Alberta have created a bedrock pool of about 25% constant support in Alberta for our own Independant country. Alberta is the milch cow that unwillingly funds all the Socialist programs in Canada. Personally I would vote if given the chance for Independance in Alberta in a heartbeat. Canada has been run basically by one family for over 40 years. Alberta will slow back as Dale said. Real Estate is falling here in Alberta. Projects are being put on hold due to cost and financing. Commodities will drop. Depending how long the USA is in trouble will determine how deep in the shit Canada and Alberta sinks. Mexican oil production fell 9% this year, and will continue to fall. As the world closes in the USA will need Alberta oil more than ever, what will burst Alberta's bubble more than anything short term will be expanded oil production offshore USA, if it ever really brings on new production. And if any of the 4 Socialist Parties in Canada get elected with the Federal election Oct 14th in Canada. If they get in it will be very bad for Alberta. This will stiffen the necks of Albertans and strengthen the Independance movement in Alberta very fast. Many young people that bought real estate in Alberta near the top of the last peak wil be hurt. Those that saw it coming and got out of debt, will weather the storm better depending how deep it goes. The Gathering Storm is approaching us all.

[Maddog78]

I agree completely.

Not everyone in Canuckistan drink's the Kool Aid, especially in the west.
Nickel is far from representative of the way all people think in Canada, again especially in the west.

[deMolay]

Devastation in Alberta's Oil Patch. http://www.theglobeandmail.com/servlet/ ... tory/Front