Royal Bank of Canada Chief Executive Officer Gordon Nixon and other bank heads forecast a “soft landing” in housing even after home sales tumbled almost 20 percent in major cities and new home construction grew at its slowest pace in a year.
“When you read the press these days, it almost sounds like we’re in the midst of a crisis -- and we’re not,” Nixon said at the RBC Capital Markets bank CEO conference in Toronto yesterday. “Our expectation is that the overall real estate market in Canada is still relatively solid.”
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The country’s housing market is slowing after policy makers tightened mortgage rules to cool prices which had surged as much as 136 percent in Vancouver and 74 percent in Toronto in the decade to December. Finance Minister Jim Flaherty cut the maximum amortization period on mortgages the government insures to 25 years from 30 years in June, the fourth restraint in four years, while the Office of the Superintendent of Financial Institutions, Canada’s banking regulator, introduced tougher standards for mortgage lenders.
Nixon, who heads the country’s biggest bank, said he sees a modest decline in Canadian real estate, with a pullback in markets such as Vancouver, the country’s third-largest city. Consumer loans, including mortgages, are due for single-digit growth in 2013, he said.
Canadian banks, ranked the world’s strongest for five straight years by the Geneva-based World Economic Forum, will “struggle to deliver meaningful earnings growth in their businesses in the coming year,” as the housing market slows, said Jason Bilodeau, an analyst at TD Securities, in note to clients in December.
Mortgage growth will fall below 5 percent in aggregate, with Royal Bank pegged at 3 percent to 4 percent, National Bank of Canada (NA) at 4 to 5 percent and BMO’s loan growth unchanged, Bilodeau said. That compares with 9.4 percent average growth among the country’s six largest banks last year, Bilodeau said.
Canadian home sales in major cities fell 19 percent in December from a year earlier, according to figures from local real estate markets compiled by Bloomberg, driven by a 31 percent drop in Vancouver and a 20 percent decline in Toronto. Average prices on resale homes rose 1.5 percent in Canada and dropped 2.3 percent in Vancouver over the same period.
Home starts fell for a fourth month in December, bringing the indicator to its slowest pace in a year, according to government figures. Work began on 198,000 homes at a seasonally adjusted annual pace, down 1.7 percent from a revised 201,400 in November, Ottawa-based Canada Mortgage & Housing Corp. said in a statement today.
“I think we’ve probably gone past the risk of an outright collapse in the market and in fact house prices may just stagnate, condominium prices may just stagnate for a couple years, and I guess that’s the definition of a soft landing,” William Downe, CEO of Bank of Montreal (BMO), Canada’s fourth-biggest lender, said at the conference.
The banks are prepared for a slowdown and the impact of cooling loan growth will have a minimal impact on bank revenue in 2013, John Kinsey, who helps manage about C$1 billion including bank shares at Caldwell Securities Ltd. in Toronto, said in a phone interview. Banks will mitigate financial risk by raising fees and cutting full-time jobs, he said.
Royal Bank of Canada (RY) gained 15 percent in 2012 and beat its competitors in the bank subindex of the Standard & Poor’s/ TSX Composite Index. Royal Bank rose 36 cents or 0.6 percent to C$60.95 at the close in Toronto today.
A decline in housing prices may reduce revenue and earnings at Canadian banks though it will probably not spark a wave of U.S.-style loan losses since about three-quarters of home loans are insured by CMHC and other insurers, said Peter Routledge, a bank analyst at National Bank Financial. The CMHC would bear the majority of loan losses, not the banks.
Still, Bank of Nova Scotia (BNS) CEO Richard Waugh said the condominium market is worrisome. “You’ve got to worry about the asset bubble,” Waugh said at the conference. “Even though I think it’s a soft landing, it doesn’t mean we don’t watch it.”
Buyers in Toronto, which has more skyscrapers under construction than any other city in the world, are “balking at looming supply,” and “one concern is that speculators could unload their units when prices decline,” Sal Guatieri, an economist at BMO, said by phone.
“Our exposure to the condo market in Canada is modest in terms of the construction side,” Downe said. “I think it’s less than C$700 million in loans, that’s not an accident. We did take note of what happened in the construction market in the U.S.”
Edmund Clark, CEO of Toronto-Dominion Bank (TD), the No. 2 lender in the country, said some of the drivers of the Canadian economy are weakening.
“Canada had a long period with great tailwinds, and some of those tailwinds are going away,” he said. “In particular, obviously the housing market has been going away.”
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