Canadian households reach record debt to income level

The ratio of debt to income rose to 167.8 percent from 166.6 in the first quarter, according to Statistics Canada. This means that for every dollar of income, Canadian households had $1.68 of debt. The Bank of Canada increased interest rates both in July and September. The early September hike was from 0.75 percent to 1 percent. Many economists predict more increases in the future. The debt ratio has been high for some time. In the third quarter of 2016 a record was also reached at 166.9 so the present debt level is not a huge increase.

Paul Ferley, assistant chief economist at the Royal Bank of Canada (RBC) said: "Certainly it's confirming that debt levels remain high and (are) creeping up a little bit higher. That's been an ongoing vulnerability for the Canadian economy." Ferley thought that the higher interest rates might dampen consumer demand but he thought that most households would be able to cope. However, Scott Hannah of the Credit Counselling Society warned: "Canadians continue to 'tread water' and are at risk of reaching their tipping point where they can no longer manage their debt payments."

Canadian households borrowed $28.9 billion on a seasonally adjusted basis, up considerably from $25.4 billion in the preceding quarter. Mortgage borrowing actually declined from $19.2 billion to $16.5 billion in the second quarter. Consumer credit and other non-mortgage loans showed a sharp increase to $12.3 billion from just $6.2 billion as Canadians bought more durable goods including autos. The debt service ratio is unchanged at 14.2 percent. The ratio measures debt principal and interest payments as a proportion of income.

A recent survey carried out by the Canadian Payroll Association show that almost half of all Canadian workers are just living from paycheck to paycheck as their spending soars and debts increase. The poll found that 47 percent of those polled said it would be difficult for them to meet their debt obligations if their paycheck was delayed by just a week. 35 percent of respondents felt overwhelmed by debt. The survey was of 4,766 Canadian employees and was taken between June 27 and August 5. 32 percent of those polled said that mortgage payments were most difficult to meet while 23 percent thought credit card debt was the hardest to manage. 32 percent said that high living costs was their main reason for increased spending while another 25 percent cited unexpected expenses. This was an online survey and is not assigned a margin of error since the sample is not random.

More and more Canadians borrowing against their home equity

According to some Many Canadians may now be turning to their home equity as a way to raise money to fund a lifestyle that could be unaffordable for some.

A recent article in BNN points out that more and more Canadians are using their homes as if it were an ATM from which they could withdraw. Since 2011 the number of Canadians who have taken out a home equity line of credit (HELOC) has risen by 40 percent. As many householders are still paying on mortgages and other debts such as car loans, the added debt can sometimes not be managed. Many are not able to even make regular payments on time.

The Financial Consumer Agency of Canada's(FCAC) commissioner Lucie Tedesco said: "At a time when consumers are carrying record amounts of debt, the persistence of HELOC debt may add stress to the financial well-being of Canadian households." The Agency's report says there are about three million HELOC accounts in Canada, and the average outstanding balance is $70,000. Canada's debt to income ratio has now risen to record levels even higher than that in the US before its 2008-9 housing crash. Should there be an unexpected economic shock many households could be vulnerable and end up losing their homes.

The agency report actually shows that about 40 percent of consumers are unable to make regular payments towards the HELOC principal. Most consumers are unable to repay their HELOC until they sell their homes. The report note that banks were combining term mortgages with HELOCs and other products to customers, creating complex products that customers often did not understand too well. The FCAC report said: "Banks reported to FCAC that a readvanceable mortgage is now the default option offered to credit-worthy mortgage customers with down payments of at least 20 per cent,."

Some analysts fear a housing bubble, especially in areas such as Toronto and Vancouver, but unlike the US, Canada does not have much of a sub-prime mortgage market where loans are made that are quite risky nor does it have the complex credit products that fooled borrowers and investors in the US housing crash. However, the report shows clear signs that there are dangerous trends in Canadian's borrowing based on their home equity. The appended video shows prices in the Toronto housing market have declined recently due to government policy.

There are several other ways that you can borrow against the equity in your home as well as a HELOC. Many people choose to take out a second mortgage or a reverse mortgage. The options are outlined here.

The Mortgage Professionals Canada put out a report in which their chief economist William Dunning shows that 1.91 million Canadians now have a HELOC a lower figure than FCAC it would seem. Perhaps many who hold the accounts are not Canadian. The report estimates that 21 percent of Canadians who purchased their first home before 1990 still have not paid off their entire mortgage. One percent of those who bought homes between 2014-216 actually have negative equity in their homes. 4.3 million Canadian homes have a mortgage but 3.57 million homes have neither a mortgage or a HELOC. There are fully 1.48 million Canadian homes with both a HELOC and a mortgage. Canadians take out a HELOC not just because they need cash. A full 28 percent just used the HELOC for debt consolidation a smart move with low borrowing rates. Another 31 percent used the money to actually invest in the house for renovation and repair. Only 9 per used the credit for general purchases and finally 9 percent claimed to use it for other reasons. It would seem that many use the HELOC in quite sensible ways and only a small minority to finance what may be an unaffordable lifestyle.

Canadian household debt greater than GDP in second quarter this year

Canadian household debt's ratio to household income rose to a record high in the second quarter according to statistics just released by Statistics Canada.

The report is likely to raise concerns that Canadian consumers are overborrowing. Statistics show that the ratio of household debt to disposable household income rose to 169.85 percent from 167.37 percent in the first quarter. For every dollar of disposable income, Canadians are spending $1.70. The ratio of household debt to gross domestic product rose to 100,54 per cent compared to 98.7 percent in the first quarter. This means the total household debt during the quarter was slightly greater than the value of GDP during the quarter.

The long period of low interest rates after the financial crisis have encouraged Canadians to take on more debt. This is especially true with respect to buying homes, with the result that prices have shot up in most markets. In markets such as Vancouver or Toronto houses are simply too expensive for the average Canadian to purchase.Many Canadians believe that housing for them is no longer affordable and even those thinking of buying a house worry that the price rise is a bubble that will burst. At the end of the second quarter, Canadian mortgage debt was at $1.29 trillion.

Borrowing by Canadians in the second quarter was $29.2 billion, seasonally adjusted. This is $3.5 billon more than in the first quarter. Mortgages accounted for $19.1 billion of the total up from $18.4 billion in the first quarter. The Bank of Canada has said the high debt level posed a vulnerability for the financial system, and that the amount of debt compared to disposable income was becoming alarming. The continued rise in home prices has increased the net worth of Canadians at an average of $271,300 as compared to $266, 900 in the first quarter.

Laura Cooper, of the Royal Bank of Canada, said: “Households are in an increasingly precarious position” and “should continue to be cautious" about adding debt. However, the share of mortgage loans in household debt has remained stable at 65.6 percent. This is the first time since 1910 that the mortgage loan share has not increased from quarter to quarter. In spite of the high levels of debt, most families are able to meet their debt obligations with credit-market debt still at only about 20 percent of their net worth.

2015 was a dismal year for oil prices, the loonie, and Canadian stock markets

On the final trading day of the 2015 on Thursday, the S&P/TSX composite in Toronto was at 13,009, a loss of 132 on the day and off 11 percent from a year ago. This is the worst performance since 2011.

The TSX peaked on April 15 at 15,524 but since then has dropped 16 percent. The Canadian economy has struggled with output flat or even down some months. In the U.S. stock markets performed better than in Canada but turned in a mixed performance. The Dow Jones dropped 2.2 percent over the year, and the S&P 500 less than one percent. The Nasdaq actually gained 5.7 percent.

Oil has suffered an even more dramatic decline in price. A barrel of West Texas intermediate dropped by 38.6 percent during 2015. This is the worst performance since the financial crisis back in 2009. At the close, the price was up marginally at $37.05. For some producers, oil prices are already below the "marginal cost of supply." With producing giants such as Saudi Arabia refusing to cut back production, higher-cost producers will cease expanding production and in some cases even stop production. The situation is ripe for takeovers by larger companies with cash to buy companies struggling to survive and starved for cash. While no one knows how low oil prices could go, Goldman Sachs made headlines by suggesting last week that WTI could go as low as $20 a barrel. Many analysts see this as an overly pessimistic estimate and see the price as close to a bottom now with demand beginning to increase. A year and a half ago oil was priced at over a $100 a barrel. Oil and gas revenue for 2015 was expected to be about $91 billion about 40 percent below 2014.

In May of 2015 oil surplus hit two million barrels each day. In August oil storage reached a level not seen in 80 years. The Canadian Association of Petroleum Producers(CAPP) reported that there had been layoffs of 35,000 in Alberta.

Suncor CEO Steve Williams said:"There is not a sudden moment when we realized prices were going to be lower for longer. There is consensus now that prices are going to be low and for much longer than people anticipated."Some auction houses in Alberta are seeing their business boom as companies sell off equipment to keep cash flowing.

Scotiabank Economics has lowered its price forecast for oil prices next year after the recent OPEC meeting that failed to announce any production cut. The prediction is for WTI to be from $40 to $45 a barrel for 2016 and only $45 to $50 for 2017. Scotiabank said that in the short term WTI could fall as low as $30 dollars a barrel. Common forecasts put the price as flat until rising demand and falling output will raise prices. A long term forecast by the International Energy Agency puts the price of oil back at about $80 a barrel by 2020.

The loonie dives in tandem with oil prices as it dropped 16 percent relative to the US dollar over the year. This is close to the 18.6 percent the loonie lost during 2008. On Thursday the loonie was trading at 72.34 cents on the U.S. dollar. While the lower loonie may help some of our export businesses especially to US markets, it has resulted in higher prices for goods imported from the US such as fresh fruit and vegetables. Canadian tourists and snowbirds will find it will cost them more Canadian dollars on their journeys.

One area where prices are on the rise is in the housing market, especially "hot" areas such as Vancouver and Toronto. Also rising are Canadian household debt levels. As interest rates remain low, Canadians are often enticed into buying while they are still able to afford monthly payments. It is quite possible that 2016 could see a property value crash, especially in overheated markets. In areas hit by low oil prices some realtors are already closing up shop.

In 2016, the Canadian Real Estate Association forecast home prices to increase by 1.4 percent compared to the 7 percent in 2015. However, larger price increases are expected to continue in areas such as Vancouver and Toronto. One factor is that the low loonie makes these properties attractive to foreign buyers. Job growth has been relatively strong in these cities and demand for housing increases as workers migrate away from provinces such as Alberta. The inflow of immigrants will also increase demand.

Low interest rates may entice more Canadians to take on more debt, even though the ratio of household debt to income is now 164 percent compared to about 100 percent in the late 1990s. Over the past year household debt in Canada rose to $1.88 trillion. Mortgage debt rose by $74.7 billion or 5.9 percent. If jobs are lost or interest rates increase many households will find it impossible to cope with their debt loads. The enclosed video is from March of this year.

Mark Carney: Excessive household debt could threaten economy

Mark Carney Bank of Canada governor said that if excessive household debt threatened the economy he would act. Ten per cent of Canadians could be unable to meet their mortgage payments if interest rates increased to more normal rates says Carney.

Carney remarked:"In exceptional circumstances, if there are issues that threaten financial stability, such as household debt ... the bank could use monetary policy for that purpose," Most economists think that the Bank of Canada will keep interest rates at one per cent for some time yet as the economic recovery remains fragile. However there were good job numbers for the month of March many times the predicted amount. Perhaps this indicates the economic recovery is being sustained. The interest rate at present is far below the inflation rate.

At present household debt is 150 per cent of income. Carney claims this is unsustainable. Carney said:"We have never been as indebted as we are today as individuals," If Carney does decide to raise interest rates this could cause problems for those barely able to pay their mortgages now. See this article for more.

Canadian debt goes up and net worth goes down

  Statistics Canada released figures showing that the net worth per household dropped by $4,600 (Canadian) last quarter mostly because of declines in the value of equities and pension assets. In spite of  relatively hard times Canadians have continued borrowing. Over a year the per capita debt has risen by $2,200 dollars to a total of $46,100. The total is a humongous 1 trillion dollars in mortgages plus another 448 billion in consumer credit.
    The governor of the Bank of Canada warned Canadians they must ease up on spending as the level of debt averages over 150 per cent of income as the most recent Statistics Canada figures show. Net household worth has been declining as debt has been increasing. In the third quarter of this year net household worth dropped 2.1 per cent. This is the second consecutive quarter in which net household worth has declined.
   Government debt has also been rising. In the second quarter government net debt was 46.3 of GDP but this last quarter was 46.9 per cent of GDP. This is still quite moderate compared to many countries. Canada's problems may be more with consumer debt. Consumers saddled with large debts in a sluggish or declining economy are not a recipe for growth or even social peace. For more see this article.

Canadian Household Debt at Record HIgh

The average household debt is 96 thousand dollars quite a sum to my ears but then our household debt is less than ten thousand! The Conservative government is making mortgages slightly more difficult to get but not so much as to have a drastic effect on demand. Already more mortgages suffer from overdue payments. In general it would seem that there may be somewhat of a slowdown in demand with these debt levels. But in the housing sector this may be to the good and prevent another bubble. As the moment the housing market seems to be a bit too hot in many areas.


Household debt at record high: report
CBC News
Canadian household debt soared to a record average of $96,000 last year, and more families were behind in paying their mortgages, according to a study by the Vanier Institute of the Family.

The number of mortgage payments at least 90 days late was up 50 per cent in 2009, compared with 2008, indicating that while the recession may "technically" be over, it could be a long and challenging recovery for Canadian families, the study found.

The average debt per household of $96,100 includes consumer and mortgage debt and represents an increase of 5.7 per cent from a year ago.

"The effects of this recession will test the resilience of many Canadian families," Clarence Lochhead, the Institute's executive director said in a news release Tuesday. "While the stock market may be up, the improvement for families will lag behind in terms of employment, increases in income, and a return of net worth."

The 11th annual study, entitled The Current State of Canadian Family Finances, stresses that personal debt is an increasing problem at the kitchen table.

The number of credit card holders who were behind at least three months in their payments was up 40 per cent in 2009.

Study author Roger Sauvé also flagged growing concern over the likelihood of a housing bubble. He noted that over the past 20 years, house prices have averaged 3.7 times household earnings but are now five times earnings, with real estate now providing 48 per cent of the net worth of Canadian households, the highest it has been in 20 years.

Another trend noted in the study is that the rich continue to get richer.

Although average family incomes have risen over the last two decades, not all families have benefited equally. In 1990, the top fifth of families took in 37.1 per cent of the incomes generated by all families in the economy. This increased to 39.7 per cent by 2007.


Read more: http://www.cbc.ca/consumer/story/2010/02/16/consumer-family-finance-vanier.html#ixzz0fisBZbly

Ratio of Canadian Household Debt to Income of 140 percent.

Given the low interest rates it is not surprising that Canadian real estate sales are doing well and house prices are rising in contrast to the US. However as this article shows the result of low interest rates is that consumers are piling on debt as well and this may not bode well for the future especially if there are more job losses or a decrease in economic activity.



Increasing household debt stirs concern
Bank of Canada worries about jump in borrowing
By PAUL VIEIRA, Canwest News ServiceDecember 11, 2009
Rising levels of household debt and deteriorating budget balances in several countries will emerge as the most prominent risks to the Canadian financial system over the next few years, the Bank of Canada said yesterday.

In its semi-annual review of the Canadian financial system, the central bank said the level of vulnerability to an adverse near-term shock has declined modestly. Furthermore, the likelihood of a renewed global downturn has diminished since the release of its previous assessment in June.

"At the same time," it warned, "several medium-term risks have intensified."

Two were singled out: rising levels of household debt, perhaps spurred in recent months by consumers looking to take advantage of record-low borrowing costs; and an inability to resolve global trade imbalances, which the bank warned could cause a "disorderly" adjustment in exchange rates.

The central bank said the review is meant to provide an assessment of downside risks that could cause stress in financial markets, even if they are low-probability events.

Nevertheless, it acknowledged the ratio of household debt to income has climbed to "historically" high levels of more than 140 per cent.

"The medium-term risk to financial stability arising from the household sector is judged to have increased," it said. "This judgment is predicated on concerns that the sustained growth of household debt in the context of rising interest rates will increase the vulnerability of households to an adverse shock over the medium term."

Asked yesterday about the issue of household debt, Finance Minister Jim Flaherty told reporters an increase in this area is "to be expected during what has been a serious economic downturn."

He added, however: "Well, you know, we certainly want people to be careful because interest rates are very low now and there's lots of liquidity in the system. There's lots of money being lent and I do ask Canadians to be mindful of the fact that interest rates will not be low indefinitely."

Financial Post

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