The Bank of Canada has been fretting about the ballooning debt of
Canadian households. Last year, it repeatedly called it a risk to
“financial stability,” perhaps in preparation for raising its benchmark
interest rate. Then Canada’s economy tanked.
In July, when the freaked-out Bank of Canada cut its benchmark rate
for the second time this year,
it admitted that the rate cut comes at the price of “financial
stability risks” which “remain elevated.” Governor Stephen Poloz added:
“Of particular note are the vulnerabilities associated with household
debt and rising housing prices.”
These rate cuts didn’t do much to support Canada’s resource economy
that has been spiraling down in the wake of the commodities rout. But
they made up for it by inflating the housing bubble even further.
The Teranet–National Bank house price index, released September 14,
hit new records every month this year. In August, it was up 5.4%
year-over-year. Note how the index has soared since the peak of the
prior housing bubble that ended with the Financial Crisis:
The index masks what Marc Pinsonneault, senior economist at NBF’s
Economics and Strategy,
calls the “dichotomy” of Canada’s housing market. In some cities, price
increases are cooling, year over year: Victoria +3.2%, Edmonton +0.8%,
Calgary +0.7%. In other cities, prices are actually falling
year-over-year: Winnipeg -0.4%, Ottawa-Gatineau -0.4%, Montreal -0,5%,
Quebec City -0.7%, and Halifax -1.4%.
But they’re sizzling in Vancouver +9.7%, Hamilton +8.8%, and Toronto +8.7%. And prices for
non-condo homes in Vancouver and Toronto – the two cities account for 54.1% of the index – jumped over 10%!
On cue, total
consumer debt
rose 4.9% year-over-year in July to C$1.86 trillion. A trend that has
been picking up speed recently: on a monthly basis, consumer debt jumped
in July at an annualized rate of 5.4%. Mortgage debt – over two-thirds
of total consumer debt – soared at an annualized rate of 6.9%.
Yet disposable incomes only inched up 0.8% in the second quarter,
Statistics Canada
reported on September 11. So the household-debt-to-disposable-income
ratio, a measure of household leverage, hit a record 164.6%, the largest
jump in the ratio since 2011:
“Fortunately, there’s little need to fret about households’ ability
to carry all that debt,” BMO Capital Markets senior economist Benjamin
Reitzes wrote in a
note.
Interest rates are super-low, and thus the burden of carrying all this
debt still manageable. But even he conceded that “further increases
would start to ramp up our level of concern.”
The ratio is an average. There are many Canadian households with
little or no debt. But then there are many other households whose
incomes have not fared well, and who have piled on debt to buy a modest
home in one of the most overpriced housing markets in the world.
And they’re not just borrowing to buy homes. In its consumer credit report for the second quarter, released September 15,
Equifax Canada
reported that auto-loan balances increased by 3.9% year-over-year. And
installment-loan balances (credit cards, etc.) jumped 8.0%.
Consumers are beginning to stretch.
But no problem. Despite increased debt loads, the 90-day-plus
delinquency rate is down 1.6% and bankruptcies are down 9.4%, Equifax
reported, as they should be, given the increasingly easy and cheap
credit sloshing through the land: borrowers aren’t going to fall behind
if they keep getting new money. It’s when they can’t get anymore new
money….
But suddenly there are problems: rising delinquencies in “some of the sub-segments” of the population, the report warned.
We’re starting to see the impact of low oil prices in the
West as these prices are forcing a new reality on Alberta and
Saskatchewan in particular. In these two provinces the debt levels are
stable, but the delinquency rate has started to increase.
On a demographic basis, the 90+ day delinquency rate for Canadians
aged 65+ rose for the first time since 2010. The rate increased by 2.4%
this quarter versus a decrease of 5.1% in the previous quarter.
So the oil patch is experiencing rising delinquencies. And across
Canada, for the first time since the Financial Crisis: seniors!
Equifax promised to “monitor this trend closely in the coming quarters.”
This ballooning household debt “puts Canadian consumers in a
precarious situation,” Scott Hannah, CEO of the non-profit Credit
Counselling Society, told the
Toronto Star.
“If they’re struggling to manage their increasing debt obligations now,
a sudden change in external factors — like a rise in interest rates or
the loss of a job — will leave many Canadians in greater financial
difficulty.”
It’s for a reason that the Bank of Canada called this enormous amount
of household debt a “financial stability risk.” The fact that
delinquencies have started to rise in the first subsectors – despite
historically low interest rates and super-easy money – is the audible
ticking of a time bomb under one of the most overpriced housing markets
in the world.
Spiking numbers of “half-empty” office buildings? “Canada is also in
the midst of an ill-timed supply surge that caused vacancy rates to
rise, warns a new report. It paints a picture of an epic office boom
turned into an epic office glut.
