Friday, July 17, 2015

Indebted Canadians

So, according to CBC, we're up to 163% debt-to-income in Canada. And the worry from the experts is that interest rate cuts to aid the sputtering Canadian economy will entice us stupid Canadians to splurge on more debt.
According to Statistics Canada, the ratio of household debt to disposable income was near record levels at 163.3 per cent for the first three months of the year. That means for every dollar of disposable income in a typical year, Canadians carry about $1.63 of debt.
The Bank of Canada lowered its key lending rate to stimulate spending and investing in a sluggish economy. But even central bank governor Stephen Poloz acknowledged that the move could put some Canadians at risk because of mounting debt.
"Of particular note are the vulnerabilities associated with household debt and rising housing prices. And we must acknowledge that today's action could exacerbate these vulnerabilities," he said on Wednesday.
However, Poloz warned the risks could be even greater if the economy went unchecked and spiralled out of control thanks to triggers "such as a widespread and sharp decline in economic activity and employment." (Emphasis added.)
They spend a lot of time talking to one Murad Ali:
Murad Ali sees the rate cut as a gift because it gives him justification for taking out another loan.
"It's Christmas in summer," he says.
When CBC News first interviewed Ali for a debt story last month, he already owed about $400,000 in lines of credit — money that he used to fund everything from renovations to trips to designer goods. The big spender wanted to get another loan but was hesitant to add to his bills.
But now that chartered banks are lowering their lending rates, Ali tells CBC News he's decided to switch to a cheaper variable mortgage and finally get that longed for additional line of credit. He estimates he'll borrow about $50,000 to buy more furniture for his new Richmond Hill, Ont., home.
"[I'm] very excited. Everything's a risk but it's a much more managed risk," he says, because of lower rates.
I'm going to go out on a limb here and say that I'm pretty sure you could go back to the 1930s in Canada and find anecdotes about people who lived beyond their means.
Hat-tip to the Financial Post
 But the chart above is measuring the country as a whole. So, either Canadians in 1996 were a LOT more sensible and frugal and responsible and mature and thrifty and smart and etc., than Canadians today, or (more likely) external factors to Canadians' decision-making has led to this increased indebtedness.

(By the way, sure, Murad Ali owes something like $400,000 on trips and luxury goods, but it appears they own two investment condos and he's employed as a software engineer. The original story with Murad Ali doesn't even give his debt-to-income ratio!)

The Stephen Poloz quote bolded above mentions rising housing prices. In an answer to an email question from me, the Canadian Centre for Policy Alternatives told me that, yes indeedy, the vast majority of the rise in Canadian household debt levels is due to the rising cost of housing. 

Affordable housing is a rarity these days. Thanks to the glorious Liberal hero Paul Martin, who abolished the federal housing ministry, and who then imposed savage cuts on transfer payments to the provinces, affordable housing in places like Toronto has twenty year waiting lists and the housing stock that they have is falling apart due to years of neglected maintenance.

Rents have skyrocketed. Incomes have stagnated. Those who can afford it see more sense in putting a down-payment on a house when the cost of rent is equal to the cost of a mortgage.

By the way; According to this Maclean's article, residential housing went from 17% of GDP to 19% in 2012. (I'd guess it's higher still.) We'd be in deep shit if and when stupid Canadians stopped racking-up their debt levels, wouldn't we? 
Rising housing prices. Rising tuition debt levels. Stagnant, uncertain incomes. That's capitalism for you. Depriving people of the means of existence; manipulating them with advertising to want to consume more and more. Covering the difference with debt. And, all the while, driving the eco-system to the point of collapse. (Amazing that I care about that last bit while not voting for the Green Party of Canada 'eh?)

Tomorrow, I'll try to see if it's possible to have rising median incomes and rising inequality at the same time.


Purple library guy said...

Just the rising house prices could be having a huge impact. I mean, in Vancouver I think the average new mortgage is heading for a million bucks--which is to say, like 1000% of the median household income, let alone 163%.
Such irresponsible people, wanting to purchase dwellings. Government should have stepped in and regulated the market ages ago.

thwap said...


And, one thing, I wonder how much of that is foreign money.

I'm not about to launch into an anti-immigrant tirade. But the fact of the matter is that Canada is a small country population-wise. If one million wealthy dual-citizens from around the world decided to purchase property in the evidently safe and solid Canadian urban markets (especially Vancouver, Toronto and Montreal) that could have an enormous impact.

But I think a lot of it is rising rents, declining rental space, plus the condo-mania phase.

Regardless, as you say, it is the purchasing of dwellings, and not $7,000 handbags that is responsible for the bulk of Canadian household debt.

Filcher said...

When I was young we were taught that the Communists would take our houses, our incomes and our pensions. To late I found out it is capitalism that was the true culprit.

thwap said...


It'd be like serfdom except the lords of the land have no use for us.

Owen Gray said...

More and more wealth gets concentrated in fewer and fewer hands.