Toronto Real Estate

Part of what my mortgage broker does is keep me posted about what the economists in his organization are thinking. Ramy Ibrahim works for TD Canada Trust and recently he sent me an article from the Financial Post written by Eric Lascelles.

Interestingly all this discussion about how credit has been withdrawn from the USA and Canada is far from true, according to Lascelles. In fact he states that lending in both countries is growing.

Rather than paraphrase what he has to say, I will post the article below.

Credit markets are supposed to be frozen and yet lending continues to grow. Perhaps things aren’t as bad as we think

By Eric Lascelles

It has been a mighty struggle for both the economy and financial markets since the credit crunch began. A popular explanation for the underlying woes involves banks’ understandable reluctance to lend in the current environment, making it difficult for consumers to spend and businesses to expand.

A close look at the numbers reveals both a great mystery and a surprise: Credit has not actually been withdrawn at all — to the contrary, it is growing in both the U.S. and Canada.

 On the surface, it is perfectly natural to assume that U.S. bank lending has been scaled back sharply. After all, U.S. borrowing rates have only inched lower despite 425 basis points of Fed easing.  Many banks have taken large losses, which disinclines them towards lending.  And, simultaneously, the U.S. Senior Loan Officer Survey would have you believe that banks have virtually shut down their loan business. It is a similar situation in Canada, where borrowing rates have also been sticky and loan surveys grim.But the official record says that U.S. banks have not actually reduced their lending by one iota since the beginning of the credit crunch, nor have borrowers apparently scaled back their appetite. In fact, U.S. commercial banks continue to lend to a remarkable degree. Real estate lending is up 4% on an annual basis and consumer loans are up a remarkable 9%.

In all fairness, one obtains a slightly skewed perspective by focusing solely upon lending from commercial banks, as we have done so far. There is an entire universe of lenders out there. For instance, credit union lending to consumers has shrunk by 0.1% annually, non-financial businesses (i.e. department stores that issue credit cards and auto companies) have cut lending by 3.9%, and savings institutions are down 9.0%. But even accounting for this, overall consumer credit outstanding has grown by 4% over the past year.  Hardly a disaster.

Meanwhile, on the business front, commercial and industrial lending has grown by an eye-popping 13% annually. While some of this may represent a re-intermediation of credit towards banks as credit markets grow less welcoming, the commercial paper market argues otherwise. For all of the legitimate worry about this spigot being broken, non-financial commercial paper issuance continues to edge upwards, growing by $7-billion in October alone. This means that ordinary corporations have succeeded in rolling their paper.

Of course, most of the aforementioned programs are growing less quickly than they were a few years ago. But even this modest to moderate growth is astonishing given the heaving forces and crushing pressures that are weighing on economies and financial institutions alike.

For Canada, the overall situation is not so different.  Mortgage lending has grown by a large 7.7% over the past year, personal loans are up a somewhat boggling 15.3%, and business lending is down just a tad, by 1.7%. This Canadian resilience is also surprising, though not to the same extent as that found in the U.S., since the credit crunch is less severe in Canada.

Why does credit continue to grow?  We present several possibilities. First, there are unavoidable lags involved in bank lending, and banks may simply still be working on bringing the freight train to a halt. Second, it could be wrong-headed to look for an outright decline in credit — slow growth is often as bad as it gets. Third, it could simply be that existing debtors are under duress and failing to pay back their loans in time. In turn, these loans sit for longer on the books and skew the results upwards. Fourth, the vast majority of people still have jobs, are paying their mortgages, and are otherwise reasonably secure. These people can still attract prudent lending. Fifth, as securitization has fallen, the availability of loans to borrowers has gone down even as banks have maintained a steady pace of on-balance sheet loans. Sixth, it could be that banks previously misjudged the crunch depth, and thus erred in issuing so much recently.

These are all plausible arguments, and collectively they nibble away at the margins of this mystery. But one is left with the temptation to wonder whether the U.S. and Canadian economic slowdown could be less severe than is conventionally imagined. This is a distinct possibility.  But we are reluctant to settle upon this rosy assessment since countless reasons for alarm remain. There is the pesky matter of lingering lags, and what’s more, it is entirely possible that the relatively loose lending of the past year could present a further reason for pessimism if the loans prove to have been ill-judged.  Still, it is both healthy and refreshing to look at both sides of every argument. The findings herein make a less pessimistic case for the future.