Foreign dominance in Canadian real estate evident in banks’ external debt - analysis

by Ephraim Vecina03 Mar 2017
The record-high volume of external debt among Canadian banks is a possible indicator of the extent of foreign nationals’ influence in the country’s real estate markets, according to a veteran markets analyst.

In a February 27 piece for Bloomberg, Theophilos Argitis noted that Canada’s banks have racked up more than twice the amount of their external debt since the end of the recession—to around $850 billion at present, according to Statistics Canada.

“[It’s] easy to conclude that at least some of the new foreign debt has helped drive mortgage lending. In some cases, the linkage with residential mortgages is direct,” Argitis wrote. “Foreigners are already invested in the nation’s housing market through the intermediation of banks, whether they’re landlords or not.”

“In addition, an increasing amount of the debt seems to be short-term and denominated in foreign currencies -- which makes the country more vulnerable to the vagaries of global money,” the analyst explained.

However, observers should take a measure of comfort in these developments, as overseas investors appear to be taking a positive view of Canada’s fiscal prospects.

“The flip side to these numbers is that foreigners have been more than happy to finance Canada’s spending -- a sign of confidence in the country’s economy,” Argitis stated. “[One] benefit (among many) of the recent rebound in commodity prices is that Canada’s growing reliance on external financing should start to abate -- and not a moment too soon.”

Even Bank of Montreal chief economist Doug Porter seems to think so, although couched in understandable caution.

“It’s a situation where it’s not a problem until it is a problem,” Porter said. “I would say that in the last couple of years we’ve been flirting with a problem.”
 

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