Tuesday, June 14, 2011

The Great Indebted Households of Canada

Certified General Accountants Association of Canada releases a report.
The debt-to-income ratio reached a new record high of 146.9 per cent in the first quarter of 2011.
This is higher than the U.S. at the time of our crash, btw. And given higher taxes and cost of living the ability to carry debt is lower for Canadians.

While the pace of debt expansion declined in 2010 and the first quarter of 2011, household debt levels still reached a record high of $1.5 trillion in the first quarter of 2011.
If household debt was spread evenly across all Canadians, a family with two children would owe an estimated $176,461.
Consumption rather than asset accumulation remains the primary cause of the debt run up: 57 per cent of indebted respondents said day-to-day living expenses are the main cause for the increasing debt.
Single-parent families were the only category where debt increases with age, and they have two-thirds more debt than couples with no children.

The effective interest rate paid by households noticeably declined over the years; however, this did not transmute into easing debt-service burden. The mortgage debt-service ratio ended the 2010 year at the same level as it stood in 2003; the service burden caused by consumer credit experienced little change at all and was nearly identical in 2010 compared with some 20 years ago
You know what this means? It means Canadians better get their debt reduction act together while interest rates are low and/or they better be praying they stay low indefinitely.

The extent to which residential mortgages were backed by residential assets continued to deteriorate over 2010. This indicator stood at 65.7 per cent at the end of 2010, a level much higher than the 55.0 per cent average observed between 1990 and 2007.
I confess, I'm not entirely sure what this means. Will edit when I figure it out.

On another note, I'm really looking forward to some hockey.


jesse said...

"The extent to which residential mortgages were backed by residential assets continued to deteriorate over 2010"

Doesn't this just mean home equity ratio? Though I'm not sure if it means amortizing mortgages or also includes non-amortizing home equity lines of credit.

One question to ask is whether or not Canadians can carry a higher DTI ratio than Americans. That is, is this the right measure or are there other factors that provide an apples-to-apples measure of indebtedness?

Thinking about it a bit, the high ratio may be a product of a more variable rate structure than US debts that often are fixed over long terms and would carry a higher rate. IOW, Canadians are willing and able to take on more debt because interest rates are low and renegotiated as a matter of course every 5 years or less (which means rates are lower than 30 year fixed terms). If true, that's extremely concerning.

On a related note, Carney speaks publicly at a dinner tonight. Will be interesting to hear his comments.

GG said...

>Doesn't this just mean home equity ratio?

Still not sure. I asked around my colleagues with no luck. I supposed I could email the report author . . .

Equity as it is usually measured (such as by CMHC or CAAMP) has not been deteriorating, unless this report is far more intelligent and does not use bubble valuations when determining equity. Maybe that is it, the reverse of equity if one uses the real economic value of the property as the valuation. If so, 65% is a very bad number indeed and not far from worst case estimates.

The idea that lower carrying costs make increased debt more manageable is a sales pitch only. One I find frightening that the banks will even claim to be true, not just a marketing ploy. It simply encourages increasing misdirected capital, which households will notice when their job gets downsized due to a decade-long lack of business investment.

As you say here, the appetite for debt is directly related to interest rates. Clearly the credit industry has no other brakes to apply to control total credit issued. If the regulatory environment were set up properly they would not be so tied. As always, it's a credit bubble first and a housing bubble (and a commodities bubble and a stock bubble . . . etc) second.