Peter Routledge – comments on how a decline in housing prices would affect the banks

Here is an interview with an analyst at National Bank Financial. The interesting thing about this interview is how the analyst, Peter Routledge, manages to add little to the discussion. If you listen to him you’ll see. Housing prices will drop if they drop and housing prices will go up if they go up. This is normal for the “talking heads” from Bay Street.

The report, sent to clients Monday, warned that a shock to the housing market may impact household asset classes outside of real estate secured lending and “could quickly infect the broader Canadian economy.”

As home prices start to fall, people get a little bit more conservative – they stop spending. When they stop spending, the economy starts to shrink,” he said in an interview, alluding to similar experiences in the United States. “And then you get some employment problems from that.”

I don’t know about you, but I really wish the when BNN interviews commentators like Mr. Routledge that they challenge them to provide facts supporting their arguments rather than stating what may be obvious. No one really knows what housing prices will do.

Here is another interview with Mr. Routledge on BNN in February:

A chief concern is Chinese policy on foreign capital outflows. Some of that money comes to Canada, and “much of it finds its way into the housing markets of Vancouver and Toronto.”

With news that yuan outflows intensified in December and January, both markets could see further price appreciation.

But, Routledge warns at some point “in the near future,” China will take steps to stem the outflow:

  • Either by devaluing the yuan
  • By bringing in draconian capital controls
  • Or both

That would remove the so-called “price-insensitive” buyer from Vancouver and Toronto.

“Our concern is that this ‘hot’ stimulus could abruptly turn ‘cold’ and force the price of homes in those two cities down,” he writes.

There is really nothing new here. At some point, he will be right. As some point, the flow of capital from China to jurisdictions outside of China will dry up. Please Mr. Routledge, please tell me when this will happen. Most people know that when the planets align themselves, something will happen.

The spillover to the Canadian banks is an obvious consequence of all this. This will certainly be the case where homeowners have “doubled down” with a mortgage and a home equity loans. Interest is generally calculated on home equity loans on a floating rate basis. If interest rates rise, an additional portion of the homeowners cash flow will then go to paying the additional interest on the loan.