The Canadian ratio of debt to income hit 163.4% in the second quarter, up from 161.7% at the end of last year, according to figures released Monday by Statistics Canada. That’s the highest ratio of debt to income ever recorded in Canada, and more inflated than the levels witnessed in the U.S. and Britain before their housing market collapses in the mid-2000s. Words: 625
So says Barrie McKenna (with files from reporters Josh O’Kane in Toronto and Kevin Carmichael in Washington) in edited excerpts from his original article*at http://www.theglobeandmail.com/report-on-business/economy/ under the headline Canadians’ debt soars into danger zone.
Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), has edited the article below for length and clarity – see Editor’s Note at the bottom of the page. This paragraph must be included in any article re-posting to avoid copyright infringement.
McKenna goes on to say, in part:
The rise in debt levels comes as Canada’s housing market is showing increasing signs of weakness, with more than half of major markets seeing sales drop 10 per cent in September from a year ago and the average national price rising a scant 1.1 per cent over the same period. See: Video: Debt burden swells for Canadian families and Video: What’s ahead for Canada’s housing market?
In spite of tighter federal mortgage rules and repeated warnings from Bank of Canada Governor Mark Carney, debt levels continue to rise. The worry now from some observers is that a debt-fuelled housing bust could deal a double blow as the global economy stalls.
Mr. Carney reiterated Monday that efforts by Finance Minister Jim Flaherty and the federal bank regulator to deter new mortgages are “still having an impact” [suggesting that]…raising interest rates to deflate a household debt bubble would be a “last line of defence.”
The much higher debt ratio is the result of revisions by Statscan for 2011 aimed at bringing its estimates of key economic data in line with international norms. The new methodology added roughly 11 percentage points to the 2011 debt ratio, previously estimated at 150.6 per cent. The main contributor to Statscan’s revised debt ratio was a roughly 5 per cent reduction in disposable income.
“To see these numbers where they’re at now is deeply disturbing,” said Laurie Campbell, chief executive officer of Credit Canada Debt Solutions, which helps people lower their debt burdens. “We’ve got some serious issues to deal with in Canada”….
With the housing market already cooling in many major Canadian cities, Ms. Campbell worries that too many Canadians will soon be scrambling to unload homes in a down market, sending prices tumbling.
“The real scary thing to me is if the housing market tanks,” she explained. “If people have to sell – because of job loss, divorce, health, the list goes on – and they can’t get what they want, we’re going to see a lot of shortfalls.”
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Some economists fret about the similarities to [the] United States, where…a debt-to-income ratio of more than 160 per cent was the mark that began the unwinding of housing bubbles in both the U.S. and Britain but, while the Canadian ratio is “alarming,” Royal Bank of Canada economist David Onyett-Jeffries argues that it doesn’t necessarily mean Canada is headed for a U.S.-style housing bust.
Several factors play in Canada’s favour:
- Canadians have more equity (nearly 70%) in their homes than Americans ever did,
- high-risk subprime mortgages are rare in Canada, where conservative five-year, fixed-rate mortgages are the norm and
- the rate of growth of non-mortgage debt, including credits cards, is already slowing, and the same will likely happen with mortgage debt.
At the end of the day, only rate hikes will convince Canadians to behave more prudently, argued economist Diana Petramala of Toronto-Dominion Bank. “A gradual increase in interest rates by the Bank of Canada over the medium term will ultimately be required to ensure a more sustainable picture for household balance sheets,” she said. “With the cost of borrowing at record low levels, there is still a large incentive for borrowing to re-accelerate.”
Editor’s Note: The above post may have been edited ([ ]), abridged (…), and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.
According to the Case-Shiller 10-City index Canadian house prices only appreciated by 84% between 1990 and 2006 compared to 181% in the U.S.. However, as U.S. prices plunged by almost 33% between the peak in April 2006 and the trough in May 2009, the chart below shows that Canadian home prices continued to rise, driven by very low interest rates and relatively benign unemployment. By July 2012, they had reached similar heights as U.S. prices before their decline and fall. I believe that house prices and consumer debt levels are overextended in Canada and that a “Minsky-moment” may be developing in Canadian credit markets. [Let me explain why I have come to that conclusion.] Words: 1892