As regular readers of Running of the Bulls know, I'm pretty lazy. That's why I am just now getting around to posting on a report published by the Certified General Accountants Association of Canada (CGA) a few weeks ago on Canadian household debt entitled Where Is the Money Now: The State of Canadian Household Debt as Conditions for Economic Emerge. And that debt is growing.
Since inception, Running of the Bulls has highlighted the nutty Canadian housing market. It is the position of this blog that home prices in Canada are bubbly, at least in some cities, and that The Canadian Housing Bubble will end like all bubbles, badly.
Upon making this argument to disbelieving Canadians, pushback one receives is that "there is not much subprime lending in Canada." My retort is, "So?" There was no subprime lending during the last housing boom in Canada either, when home prices in Vancouver and Toronto were cut by a third from their 1990s peaks. Subprime debt is not a necessary precondition to fuel a housing bubble. What fuels asset bubbles is debt, and a lot of it.
And a whole of credit is flowing in the Canadian economy, according to the CGA. From the report.
- The level of debt adjusted for inflation and population growth shows a continuous upward trend over the past two decades, as well as in 2008-2009. In fact, if household debt was to be evenly spread across all Canadians, each individual would hold some $41,740 in outstanding debt in 2009, an amount 2.5 times greater than in 1989.
- Starting in 2003, the dynamic of household debt has changed significantly, shifting towards a high growth rate. For more than six years, the rate of credit expansion has been higher than the long-term average of 4.5%. Unlike the 1990s though, the accelerated extension of household debt was no longer supported by a similar magnitude of economic growth in the mid and late 2000s.
- The debt-to-income ratio reached a new record high of 144.4% at the end of 2009. Debt-to-assets reached 19.4% at the end of 2009, while its average for 1990-2007 stood at 15.2%. Although the debt-to-assets ratio did not deteriorate further in 2009, this stability was mainly attributable to the increase in market value of financial assets in the second and third quarters of 2009.
- The degree to which residential mortgages were backed by residential assets continued to deteriorate over the past two years. This erosion pushed the mortgage-to-residential assets indicator to 65.4% at the end of 2009, a level much higher than the 55.0% average observed between 1990 and 2007.
- The decline in interest rates and lower effective interest paid (expressed as a ratio of interest paid to outstanding debt) did not help households to reduce the share of their income dedicated to debt servicing. Instead, mortgage and consumer credit debt service ratios stayed unchanged in 2009, but were somewhat higher compared with the levels observed in the mid-2000s.
- The true cost of supporting mortgage debt may be significantly understated because debt-service ratio does not take into account such compulsory obligations as mortgage principal, property tax, mortgage insurance premiums and condominium fees. For instance, in Alberta, property taxes and condominium fees added some 27% to an average debt-service ratio for mortgages in 2008.
- The amount of outstanding consumer credit per each dollar of consumption of goods has increased significantly over the past years, suggesting that households are either using increasingly larger amounts of credit to buy the same quantity of durable goods, or that households may have increasingly adopted a practice of using consumer credit for purchasing non-durable goods.
- Some 79% of household assets may be affected by the changing dynamic of real estate or financial markets. The composition of household assets over time has become riskier, less diversified and somewhat less liquid. Stocks and mutual funds accounted for 19.2% of all household assets in 2009, more than double when compared with the level seen in 1990. Holdings of lower risk cash and deposits, in turn, decreased to 12.3% of household assets, down from 18.0% in 1990.
- Households’ exposure to rising interest rates increased. The proportion of household debt with variable rates increased from 14% in 1997 to 25% in 2007. This proportion is even higher for mortgages: in 2009, some 27% of mortgages had variable-rate terms while another 6% employed a combination of variable and fixed rates.
- If the mortgage interest rate goes up by two percentage points, mid-income and mid-to-high income families may be required to tighten their budgets by cutting an estimated 9%-11% from ‘other expenses’ if they are to maintain the current levels of spending on food and transportation. The ‘other expenses’ includes household furniture and equipment, clothing, health and personal care, education, recreation, personal insurance, pension contributions, etc.
Rising debt continues to be primarily caused by consumption motive rather than by asset accumulation. Some 56% of respondents said that day-to-day living expenses are the main cause for the increasing debt; 4 percentage points higher than the 52% reported in 2007. In turn, outlays that could potentially attract a return, such as purchasing of a residence, enrolling in an educational program or spending on healthcare, were among the least likely causes for increasing debt. ...
Some good news. Debt to income was middle of the pack compared to the OECD. But, given the problems in the global economy, that is hardly comforting. Canada ranks first in consumer debt, however.
From 2006 through 2009, consumer credit rose 41.7%, or 9.1% per year. Mortgage debt rose 46.3%, or 10% per year.
Meanwhile, home prices are at all time highs.
And have gone nutty in some provinces.
Canadians used to be good savers. Not any more.
Canada has done a lot of things right over the past 20 years. The country has been a major benefactor of both secular changes in the global economy as well as major imbalances in global financial markets. Those imbalances only partially corrected during the past recession, while new imbalances have been created and there have been few fundamental changes in the Asset-Driven Economy. Ultimately, when the imbalances re-balance, Canada will be hit. I do not want to own assets supported by low interest rates and excessive debt, no matter how cool the country or how good the hockey team.