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Some time ago, Deutsche Bank’s chief international economist, Torsten Slok, presented several charts which showed that “Canada is in serious trouble” mostly as a result of its overreliance on its frothy, bubbly housing sector, but also due to the fact that unlike the US, the average household had failed to reduce its debt load in time.

Additionally, he demonstrated that it was not just the mortgage-linked dangers from the housing market (and this was before Vancouver and Toronto got slammed with billions in “hot” Chinese capital inflows) as credit card loans and personal lines of credit had both surged, even as multifamily construction was at already record highs and surging, while the labor market had become particularly reliant on the assumption that the housing sector would keep growing indefinitely, suggesting that if and when the housing market took a turn for the worse, or even slowed down as expected, a major source of employment in recent years would shrink.

Fast forward to today, when the trends shown by Slok two years ago have only grown more acute, with Canada’s household debt continuing to rise, its divergence with the US never been greater…

… making the debt-service ratio disturbingly sticky.

Making matters worse, recent trends in average hourly earnings show that if the US Federal Reserve is concerned with US wages, then the Bank of Canada should be positively terrified.

…click on the above link to read the rest of the article…

The Inconvenient Truth of Consumer Debt

June 11, 2017

The Inconvenient Truth of Consumer Debt

It’s acceptable to build infinitely high levels of household debt — as long as rates never rise.

Ready for a rainy day?Photographer: Anoek De Groot/AFP/Getty Images

Oh, but for the days the hawks had a hero in Sydney. Against the backdrop of a de facto currency war, the Reserve Bank of Australia stood as a steady pillar of strength. The RBA held the line on interest rates, maintaining a floor of 2.5 percent, even as its global central bank peers drove rates to the zero bound and beyond into negative territory.

The abrupt end to the commodities supercycle drove the RBA to join the global currency war. The mining-dependent nation’s economy was so debilitated that policy makers felt they had no choice but to ease financial conditions. In February 2015, after an 18-month honeymoon, the RBA reduced its official rate to 2.25 percent, marking the start of a cycle that ended last August with the fourth cut to a record low of 1.5 percent.

The Bank of Canada has taken a similar journey in recent years. It embarked upon a mild tightening campaign in 2010 that raised the overnight loan rate from a record low of 0.25 percent to 1 percent in September 2010. The bank maintained that level until early 2015. Two weeks before the RBA’s first cut, the Bank of Canada lowered rates to 0.75 percent. The January move, which shocked the markets, was followed in July 2015 with an additional ease to 0.5 percent, where it remains today.

Bank of Canada Governor Stephen Poloz, who replaced Mark Carney after he departed to head the Bank of England, explained the moves as necessary to counter the downside risks to inflation emanating from the oil price shock to the country’s economy.

Two resource-rich economies reacting similarly to body blows is intuitive enough. They eased the pressure on their given economies.

…click on the above link to read the rest of the article…

These are the Countries with the Biggest Debt Slaves, and Americans Are Only in 10th place

January 23, 2017

These are the Countries with the Biggest Debt Slaves, and Americans Are Only in 10th place

So who the heck are the Really Great Ones?

Americans have been on a borrowing binge. To buy their favorite cars and trucks, they’ve loaded up on $1.14 trillion in auto loans. Young and not so young Americans are mortgaging their future with student loans that now amount to $1.28 trillion. Credit card and other debts are at $1.12 trillion. And mortgage debt stands at $8.82 trillion.

So, total household debt was $12.35 trillion, according to the New York Fed’s Household Debt and Credit Report for the third quarter 2016. That’s a massive amount of debt. Many consumers are struggling with it. Student loans are seeing enormous default rates, and repayment rates are far worse than previously disclosed. And “debt slaves” has become a term in the financial vernacular.

But it isn’t nearly enough debt…

Neither for the New York Fed whose President William Dudley, in a speech a few days ago, practically exhorted households to borrow more against the equity in their homes so that they blow this cash and drive up retail sales: “Whatever the timing, a return to a reasonable pattern of home equity extraction would be a positive development for retailers, and would provide a boost to aggregate growth,” he mused, with nostalgic thoughts of 2008.

Nor for the global rankings of debt slaves, where US households squeaked into the ignominious 10th place, barely ahead of Portugal! I mean, come on! Portugal!!

There are many ways to measure household indebtedness and debt burdens. Comparing total household debt to the overall size of the economy as measured by GDP is one of the measures. And per this household-debt-to-GDP measure, the Americans are 10th place with 78.8% and look practically prudent compared to the peak just before the Financial Crisis (via Trading Economics):

…click on the above link to read the rest of the article…

Household Debt Hits $12.4 Trillion As Subprime Loan Delinquencies Hit Highest In 6 Years: NY Fed

November 30, 2016

Household Debt Hits $12.4 Trillion As Subprime Loan Delinquencies Hit Highest In 6 Years: NY Fed

The latest just released Quarterly Report on Household Debt and Credit from the New York Fed showed a small increase in overall debt in the third quarter of 2016, prompted by gains in non-housing debt, and new all time highs in student loans which hit $1.279 trillion, rising $20 billion in the quarter.11.0% of aggregate student loan debt was 90+ days delinquent or in default at the end of 2016 Q3.

Total household debt rose $63 billion in the quarter to $12.35 trillion, driven by a $32 billion increase in auto loans, which also hit a record high of $1.14 trillion. 3.6% of auto loans were 90 or more days delinquent.

Mortgage balances continued to grow at a sluggish pace since the recession while auto loan balances are growing steadily, and hit a new all time high of $1.14 trillion.

What was most troubling, however, is that delinquencies for auto loans increased in the third quarter, and new subprime auto loan delinquencies have not hit the highest level in 6 years.

The rise in auto loans, a topic closely followed here, has been fueled by high levels of originations across the spectrum of creditworthiness, including subprime loans, which are disproportionately originated by auto finance companies. Disaggregating delinquency rates by credit score reveals signs of distress for loans issued to subprime borrowers—those with a credit score under 620.

To address the troubling surge in auto loan delinquencies, the NY Fed Liberty Street Economics blog posted an analysis of the latest developments in the sector. This is what it found.

LSE_Just Released: Subprime Auto Debt Grows Despite Rising Delinquencies

Subprime Auto Debt Grows Despite Rising Delinquencies

The rise in auto loans has been fueled by high levels of originations across the spectrum of creditworthiness, including subprime loans, which are disproportionately originated by auto finance companies.

…click on the above link to read the rest of the article…

Canada’s debt-to-income ratio sets new record high at 165%

March 11, 2016

Canada’s debt-to-income ratio sets new record high at 165%

Canadians now owe $1.65 for every dollar of income they have at their disposal.

Canadians now owe $1.65 for every dollar of income they have at their disposal. (Joe Raedle/Getty Images)

Statistics Canada says the ratio rose to 165.4 per cent in the fourth quarter, up from 164.5 per cent in the third quarter.

That means Canadian households on average held $1.65 in debt for every dollar of disposable income.

Much of that new debt came in the form of mortgages. “Most of the growth was in mortgage credit, up 6.3 per cent, which has accelerated considerably since 2014 and is now increasing at the fastest pace since late 2012,” TD Bank economist Diana Petramala said.

The increase came as disposable income increased 0.6 per cent.

However, total household credit market debt, which includes consumer credit and mortgage and non-mortgage loans, increased 1.2 per cent to $1.923 trillion at the end of last year.

The total included $573.6 million in consumer credit debt and $1.262 trillion in mortgage debt.

HOUSEHOLD DEBT RATIO

Canada’s “Other” Problem: Record High Household Debt

January 20, 2016

Canada’s “Other” Problem: Record High Household Debt

Earlier today, the Bank of Canada surprised some market participants by failing to cut rates.

True, the loonie was plunging and another rate cut might very well have accelerated the decline, further eroding the purchasing power of Canadians who are already struggling to keep up with the inexorable rise in food prices, but there are other, more pressing concerns.

Like the fact that some analysts say the CAD should shoulder even more of the burden as Canada struggles to adjust to a world of sub-$30 crude. In short, if Stephen Poloz could manage to drive the loonie lower, the CAD-denominated price of WCS might stand a chance of remaining above the marginal cost of production. Barring that, the shut-ins will start and that means even more job losses in Canada’s oil patch, which shed some 100,000 total positions in 2015.

Alas, Poloz elected to stay put, characterizing the current state of monetary policy as “appropriate.”

We’re reasonably sure that assessment won’t hold once the layoffs pick up and as we noted earlier, the longer Poloz waits, the larger the next cut will ultimately have to be, which means that if the BOC waits too long, Poloz may have to rethink his contention that the effective lower bound is -0.50%.

While there are a laundry list of concerns when it comes to assessing the state of the Canadian economy and the impact of either higher rates (the loonie is supported but growth is further choked off) or lower rates (the economy gets a boost but consumer spending is stifled as Canadians watch their purchasing power evaporate), perhaps the most important thing to remember is that Canada is now the most leveraged country in the G7.

According to a new report from the Parliamentary Budget Officer (PBO) the household debt-to-income ratio is now a whopping 171% which means, for anyone who is confused, “that for every $100 in disposable income, households had debt obligations of $171.”

…click on the above link to read the rest of the article…

Household debt still rising, but most Canadians in decent shape: experts

December 30, 2015

Household debt still rising, but most Canadians in decent shape: experts

Bank of Canada worries some Canadian households may be over their heads

Most Canadians handle debt well, but a small minority have so much, they might everntually be in trouble.

Most Canadians handle debt well, but a small minority have so much, they might everntually be in trouble. (CBC)

Canadian households will close out 2015 carrying thicker layers of debt after worrisome gains over the past 12 months — extra padding that’s expected to get even fatter in the new year.

But even with the borrowing binges, many experts still believe the finances of most Canadians remain in decent shape.

This assessment comes as the country shows worrisome signs linked to consumer spending. It has a record-high debt-to-income ratio and the central bank has called rising household debt as a growing weak spot in Canada’s entire financial system.

One big bank economist, who has closely studied household debt, said any negative fallout from the debt situation would likely depend on whether Canada sustains an unlikely economic shock.

But trouble could also hinge on how quickly interest rates eventually rise, said CIBC deputy chief economist Benjamin Tal.

Low rates helped build debt

Economic shocks remain difficult to predict and, for at least the next year, Tal doesn’t expect rates to climb at a hazardous speed for those who may have overindulged on debt.

“As a society, there is no question that we are more sensitive to the risk of higher interest rates than in any other time in history,” Tal said. “On its way up, it’s extremely powerful.”

Persistently low interest rates have been a major contributor to rising household debt. Borrowing became even cheaper in 2015 after the Bank of Canada twice dropped its benchmark rate to help cushion the blow of the oil slump.

Households, meanwhile, have dined on debt since the financial crisis and provided spending that has helped the economy recover.

…click on the above link to read the rest of the article…

“Don’t Owe. Won’t Pay.” Everything You’ve Been Told About Debt Is Wrong

August 21, 2015

“Don’t Owe. Won’t Pay.” Everything You’ve Been Told About Debt Is Wrong

With the nation’s household debt burden at $11.85 trillion, even the most modest challenges to its legitimacy have revolutionary implications.

The legitimacy of a given social order rests on the legitimacy of its debts. Even in ancient times this was so. In traditional cultures, debt in a broad sense—gifts to be reciprocated, memories of help rendered, obligations not yet fulfilled—was a glue that held society together. Everybody at one time or another owed something to someone else. Repayment of debt was inseparable from the meeting of social obligations; it resonated with the principles of fairness and gratitude.

If one debt can be nullified, maybe all of them can.

The moral associations of making good on one’s debts are still with us today, informing the logic of austerity as well as the legal code. A good country, or a good person, is supposed to make every effort to repay debts. Accordingly, if a country like Jamaica or Greece, or a municipality like Baltimore or Detroit, has insufficient revenue to make its debt payments, it is morally compelled to privatize public assets, slash pensions and salaries, liquidate natural resources, and cut public services so it can use the savings to pay creditors. Such a prescription takes for granted the legitimacy of its debts.

Today a burgeoning debt resistance movement draws from the realization that many of these debts are not fair. Most obviously unfair are loans involving illegal or deceptive practices—the kind that were rampant in the lead-up to the 2008 financial crisis. From sneaky balloon interest hikes on mortgages, to loans deliberately made to unqualified borrowers, to incomprehensible financial products peddled to local governments that were kept ignorant about their risks, these practices resulted in billions of dollars of extra costs for citizens and public institutions alike.

…click on the above link to read the rest of the article…

Household Debt Soars in Canada, “Stability” at Risk

March 13, 2015

Household Debt Soars in Canada, “Stability” at Risk

Debt by Canadian households is a special phenomenon. Statistics Canada reported today that in the fourth quarter, household debt set another breath-taking record.

Earlier this month, even Equifax Canada, which is in the business of facilitating and increasing this indebtedness, had warned about it. The total indebtedness of Canadian households, according to its own measure, had jumped 7.7% from prior year, which had already been at record levels. The biggest culprits were installment and auto loans. Households are powering consumer spending, and thus the overall economy, with ever larger amounts of ultimately unsustainable debt.

A “a cautionary tale,” the report called it.

The rapid decline in oil prices caught many by surprise. And, that’s the point – consumers and business owners need to be more vigilant. When economic change happens, it can happen very quickly and can challenge previously observed stability of key economic and credit indicators.

In other words, as the price of oil collapsed, as housing stumbled, and as layoffs began – the “economic change” that “can happen very quickly” – the “stability” of different aspects of the economy, including household debt, is suddenly at risk. It’s a warning that consumers might buckle under that mountain of debt.

Now Statistics Canada weighed in. In Q4, household borrowing, on a seasonally adjusted basis, jumped by C$22.6 billion from the third quarter. Credit cards and auto loans accounted “for the majority of the overall increase.” Total household debt (consumer credit, mortgage, and non-mortgage loans) rose 1.1% from the prior quarter to C$1.825 trillion, with consumer credit hitting $519 billion and mortgage debt C$1.184 trillion.

…click on the above link to read the rest of the article…

‘Welcome Signs Of Cooling’ In Canada’s Overvalued Housing Markets: IMF

February 3, 2015

‘Welcome Signs Of Cooling’ In Canada’s Overvalued Housing Markets: IMF

Canada’s housing markets will cool this year, leading to a more “balanced” economy — one that is not as dependent on growing consumer debt, the International Monetary Fund says.

In a report released Friday, the IMF estimated house prices are overvalued by 7 to 20 per cent, with “significant regional differences” in the amount of overvaluation.

That’s a somewhat lower estimate than the Bank of Canada, which recently estimated house prices to be as much as 30 per cent overvalued in some markets.

“Canada’s housing market rebounded in 2014, fueled by low and declining interest rates, although there are some welcome signs of cooling especially in overheated markets,” the IMF report stated.

“Welcome” because the IMF sees risk to Canada in growing household debt. The organization is worried that the country’s economy continues to rely too heavily on consumer debt, and that the kind of debt Canadians are taking on is riskier than it used to be.

…click on the above link to read the rest of the article…

Canada Mauled by Oil Bust, Job Losses Pile Up – Housing Bubble, Banks at Risk

February 1, 2015

Canada Mauled by Oil Bust, Job Losses Pile Up – Housing Bubble, Banks at Risk

Ratings agency Fitch had already warned about Canada’s magnificent housing bubble that is even more magnificent than the housing bubble in the US that blew up so spectacularly. “High household debt relative to disposable income” – at the time hovering near a record 164% – “has made the market more susceptible to market stresses like unemployment or interest rate increases,” it wrote back in July.

On September 30, the Bank of Canada warned about the housing bubble and what an implosion would do to the banks: It’s so enormous and encumbered with so much debt that a “sharp correction in house prices” would pose a risk to the “stability of the financial system” [Is Canada Next? Housing Bubble Threatens “Financial Stability”].

Then in early January, oil-and-gas data provider CanOils found that “less than 20%” of the leading 50 Canadian oil and gas companies would be able to sustain their operations long-term with oil at US$50 per barrel (WTI last traded at $47.85). “A significant number of companies with high-debt ratios were particularly vulnerable right now,” it said. “The inevitable write-downs of assets that will accompany the falling oil price could harm companies’ ability to borrow,” and “low share prices” may prevent them from raising more money by issuing equity.

In other words, these companies, if the price of oil stays low for a while, are going to lose a lot of money, and the capital markets are going to turn off the spigot just when these companies need that new money the most. Fewer than 20% of them would make it through the bust.

…click on the above link to read the rest of the article…

Household Debt In Canada Hits Record 162.6% Of Income After StatsCan Revisions

December 15, 2014

Household Debt In Canada Hits Record 162.6% Of Income After StatsCan Revisions

Canadian household debt reached an all-time high in the third quarter of 2014,Reuters reports.

Average household debt reached 162.6 per cent of average household disposable income in the quarter. Statistics Canada revised its estimates for the previous three years downward, so the new numbers are lower than figures previously reported.

The number for the previous quarter — 163.6 per cent — was revised to 161.7 per cent. That makes the new number for the third quarter the highest debt ratio yet.

StatsCan said it made the revisions because it had initially overvalued mortgages.

The Canadian Press reports:

…click on the above link to read the rest of the article…

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