18.03.2019

Your Pre-Budget Checkup

In past newsletters Btchcoin has talked about the relationship between household debt, interest rates, and the current housing market situation. With the federal budget set to come out tomorrow, we wanted to provide you with some quick insights about the Canadian economy as a whole.

Justin and Bill have had better months.
Credit: Canadian Press Images

1. Debt. According to Statistics Canada, Canadians are using a record percentage of disposable income to service their debt – 14.9% to be exact, and 7.3% of that is just going to interest payments. Breaking it down into dollar amounts, for every dollar of disposable income that the average Canadian has, they also have $1.79 of debt.

 

2. Household Net Worth. Canada is experiencing the biggest drop in year over year household net worth on record. The 3% dip can be attributed to the stock market drop at the end of 2018 as well as declining house prices. Because of these household debt statistics and other economic factors, the Bank of Canada is not expected to raise interest rates again until later in 2019.

3. Housing Prices. Another aspect that will influence the incoming federal budget is the housing market. The B-20 regulations (mortgage stress testing) have made homes more expensive for the average mortgage seeker, even though the average price of a home is falling. According to RBC Economics, “In Vancouver…the income required to cover ownership of an average home was $211,000 in 2018, up from $127,000 three years ago. The qualifying income in Toronto was $187,000 in 2018 compared to $103,000 in 2015.” Yikes.

4. Federal Budget Proposals. We’re hoping this year’s federal budget will bring some good news. Possible remedies to the above problems include longer mortgages for first time homebuyers. Currently, if home buyers only put 20% down to purchase a home, they are required to purchase mortgage insurance and they are limited to a 25-year amortization (the period in which debt is paid off or reduced) which increases their monthly mortgage payments. The proposed budget would lengthen the amortization periods for 20% down payments to 30 years, allowing first time home buyers to make smaller monthly mortgage payments.

Another proposal in the federal budget in an attempt to make homes more affordable in Canada is the Home Buyer’s Plan. This plan suggests increasing the amount home buyers can take out of their RRSP without tax consequences from $25,000 to $35,000. (Just make sure you put it back into your RRSP within 15 years!)


Air Canada Presses Pause on 2019 Financial Forecasting

Canada’s largest airline has halted its 2019 financial guidance following the devastating crash of an Ethiopian Airlines Boeing 737 Max 8, that tragically killed all 157 passengers on board.

Before we jump into the nitty gritty of how the crash will affect Canadian air travel, we’d like to take this opportunity to express our deepest condolences to those who lost loved ones. There were 17 Canadians on board the flight, including a group of young adults who were travelling to a UN Environmental Assembly in Nairobi. We’re heartbroken at the news, and our thoughts are with the families and friends of the victims.

Canada, alongside several other countries, has grounded all Boeing 737 Max 8 aircrafts following the harrowing crash, which is set to have a significant impact on the air travel industry. As a result, Air Canada has officially become the first major international airline to warn of the impact it may have its financial health by deciding to suspend all full-year 2019 financial guidance. ‘Financial guidance’ is information that includes future earning estimates published by a company for the benefit of shareholders and analysts.

It’s speculated that Air Canada is one of the North American airlines that will be hit hardest by the grounding. At the time of the crash, it operated 24 Max 8 aircrafts, comprising roughly 10% of the fleet it operates. Westjet also grounded 13 Max 8 aircrafts. That’s a sizable chunk. So what will they do?

“We believe the company has avenues to work around the grounding, including the longer in-service use of older aircraft, possible access to third-party aircraft, the temporary use of different gauge aircraft and if necessary the temporary suspension of some routes,” RBC Dominion Securities Analyst Walter Spracklin stated.

Spracklin also states that the move isn’t unexpected whatsoever, and is not considered to impact Air Canada’s longer-term view on shares. Basically, investors don’t need to be too worried.

Air Canada says it “continues to adapt a contingency plan to address the evolving situation”, and has reassured investors that guidance for 2020 and 2021 remains in place. Both Westjet and Air Canada have multiple orders for Boeing 737 Max 8’s waiting to be filled, so this story really hinges on the findings of the investigation into the jet’s failure.

We brought you the story in early March – the initial financial forecasts for Air Canada were rosy, with the airline predicting notable uptick to 19-22% in EBITDA margins, and cumulative free cash flow of $4-4.5 billion, surpassing the previous guidance of between $2-$3 billion.

The family of Micah Messent, one of the 17 Canadians that perished in the Ethiopian Airlines crash, has set up a GoFundMe in his honour. All proceeds will go to support environmental protection and Indigenous youth. You can donate here.

Global Debt: The BoC’s Public Enemy Number One

We will forever stan the staffer who thought this was a good photo op.

What keeps you up at night? Crippling existential dread? For Bank of Canada’s senior deputy governor Carolyn Wilkins (we know, her again), it’s the impact that international debt will have on Canada’s financial well-being.

Addressing an audience of students and financial experts in Vancouver last week, Wilkins warned that a decade-long explosion of global debt is causing a major lag in international economic growth and weakening the world’s financial system, on top of serving as an amplifying factor when it comes to economic downturns. Yikes.

The combined global debt owed by governments, businesses and households adds up to a whopping $240 trillion USD – about $100 trillion USD greater than it was prior to 2007 financial crisis.

“That is a headwind to growth and makes us vulnerable to another period of financial instability,” said Wilkins in regards to debt figures.

Why does global debt make her nervous? “Whether you’re a homeowner or a business person, you know first-hand that high leverage can leave you in a vulnerable financial position. It’s no different for economies,” says Wilkins.

“The world has learned this lesson the hard way on many occasions in my lifetime.”

Despite the fact the global financial system has improved leaps and bounds since the 2007 crash, current uncertainties such as trade tensions with China risk a derailment of progress in the global economy. A major contributing factor in these inflated figures comes down to the long stretch of very low interest rates that were implemented to help build momentum for global growth.

While debt is generally a less-than-ideal thing, it can be a good thing in certain instances. For example, when it comes to the public sector, a limited accumulation of debt can actually help to stimulate economic growth, while companies can benefit from borrowing as a means of investing in expanding their capacity.

“The good news for Canadian businesses and households is that the financial system — globally and here at home — is safer than it was a decade ago thanks to much stronger safeguards,” reassures Wilkins. Phewf.

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