Friday, December 17, 2010

Economic Unsustainability - Canada's Households

Canada's bankers are requesting changes to mortgage terms to reduce record Canadian household debt. 70% of household debt is mortgages.

Nice set of charts from the Financial Insights blog that compares the 5 year rate of growth in inflation, wages, consumer credit, and mortgage credit for Canada's households and discusses the implications of pulling back on more generous 35 year, low downpayment mortgages.

The Great Mortgage Amortization Debate
But the debt must eventually be repaid, and therein lies the great catch. When a society embraces a secular trend towards debt tolerance and consumerism, it’s also likely that it will experience a mean reversal in the form of an equal but opposite secular trend. The expansion in debt cannot outpace income growth indefinitely, but two things can prolong its life: Declining interest rates and/or loosening standards. But even these have their limits.
We have not travelled as far down that road as our American friends, but we’re far enough now that the return to a mean will be far from painless.
Actually, Vancouver HAS travelled that far.

Vancouver, Canada, and US House Prices through September 2010

Update: A couple of points about this chart. I realize the standardizing line (~75 on this chart) is not the bottom of each market. Fair enough. On the other hand that 1990s stable line in the U.S. is something in the manner of $135,000 dollar average price (U.S.$), and in Vancouver, $500,000 (CAN$). Even considering the shift in exchange rates (or at this point, especially considering . . .) doubling 135k is far less of a stunning feat than doubling 500k in the same calendar time. The standardizing mutes Vancouver's precipitous dollar-value rise relative to the other lines on the chart.

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