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Canadian Household Debt-to-Income Ratio Near Record High

“Households with elevated levels of debt are more vulnerable to increases in interest rates”, the Canada Mortgage and Housing Corporation redundantly observes in its latest bulletin and warns that “with interest rates on the rise, highly indebted households could see their increased required payments exceed their budgets.”

Naturally, this increased debt payment burden usually come at the cost of reduced consumption, decreased savings or opting to make lower repayments on principal amounts. Some households might even default on their loans if their incomes are not sufficient to cover higher expenses and credit charges.

And, as the CMHC ominously warns, if an increasing number of borrowers begin to default on their loans, financial institutions may decrease lending activities in response.

These negative effects could then impact other areas of the economy. Research has shown that recessions in highly indebted countries tend to exhibit a greater loss in output, higher unemployment, and last longer compared to countries with lower debt levels.

Here are some of the latest troubling observations on Canadian household debt levels from the CMHC:

Household debt to disposable income near record levels

The debt-to-income (DTI) ratio is a measure of the relative vulnerability of indebted households. While households may be able to service their debt during periods of low interest rates, some may face challenges when rates rise. Highly indebted households have usually few debt consolidation options to respond to increasing debt service costs.

Total household debt relative to disposable income has been trending higher as indebtedness has been rising faster than incomes, with mortgage debt being a major contributor, counting for two-thirds of all outstanding household debt in Canada. While the increasing trend in the Canadian DTI ratio has now paused, it remains near a record high, hovering around 170% in Canada and varies significantly among Canada’s metropolitan areas (see chart 1).

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

“Severe Collapse” of Home Prices Might Trigger a “Financial-Institution Crisis” in Australia: OECD Frets about the Bank

“Severe Collapse” of Home Prices Might Trigger a “Financial-Institution Crisis” in Australia: OECD Frets about the Bank

“The authorities should prepare contingency plans.” The big four banks are too exposed to mortgages. Even if the banks don’t topple, the economy will get hit hard.

In its latest report on Australia, the OECD focuses to a disturbing extend on housing, household debt, what the current housing downturn might do to the otherwise healthy economy, and what the risks are that this housing downturn will lead to a financial crisis for the big four Australian banks, an eventuality that it says “authorities” should make “contingency plans” for.

The big four banks are huge in relation to the Australian stock market and the overall economy: Their combined market capitalization, at A$341 billion, even after today’s sell-off following the OECD report – accounts for 26% of Australia’s total stock market capitalization.

How they dominate the stock market showed up on Monday after the release of the report:

  • Common Wealth Bank of Australia (CBA): -2.98%
  • Westpac (WBC): -3.38%
  • Australia and New Zealand Banking Group (ANZ): -4.09%
  • National Australia Bank (NAB): -2.54%

The overall ASX stock index on Monday dropped 2.27%.

These big four are heavily owned by Australian pension funds, retail investors, and the like and form a big part of the retirement nest egg of the nation. So a banking crisis that involves the Big Four matters on all fronts – and the OECD report even pointed out that a collapse in the share prices of the Big Four would itself impact the overall economy negatively.

The report (PDF) starts by explaining just how strong the economy is in Australia:

With 27 years of positive economic growth, Australia has demonstrated a remarkable capacity to sustain steady increases in material living standards and absorb economic shocks.

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

US Household Debt Hits Record $13.5 Trillion As Delinquencies Hit 6 Year High

Total household debt hit a new record high, rising by $219 billion (1.6%) to $13.512 trillion in Q3 of 2018, according to the NY Fed’s latest household debt report, the biggest jump since 2016. It was also the 17th consecutive quarter with an increase in household debt, and the total is now $837 billion higher than the previous peak of $12.68 trillion, from the third quarter of 2008. Overall household debt is now 21.2% above the post-financial-crisis trough reached during the second quarter of 2013.

Mortgage balances—the largest component of household debt—rose by $141 billion during the third quarter, to $9.14 trillion. Credit card debt rose by $15 billion to $844 billion; auto loan debt increased by $27 billion in the quarter to $1.265 trillion and student loan debt hit a record high of $1.442 trillion, an increase of $37 billion in Q3.

Balances on home equity lines of credit (HELOC) continued their downward trend, declining by $4 billion, to $432 billion. The median credit score of newly originating mortgage borrowers was roughly unchanged, at 760.

Mortgage originations edged up to $445 billion in the second quarter, from $437 billion in the second quarter. Meanwhile, mortgage delinquencies were unchanged improve, with 1.1% of mortgage balances 90 or more days delinquent in the third quarter, same as the second quarter.

Most newly originated mortgages continued went to borrowers with the highest credit scores, with 58% of new mortgages borrowed by consumers with a 760 credit score or higher.

The median credit score of newly originating borrowers was mostly unchanged; the median credit score among newly originating mortgage borrowers was 758, suggesting that with half of all mortgages going to individuals with high credit scores, mortgages remain tight by historical standards. For auto loan originators, the distribution was flat, and individuals with subprime scores received a substantial share of newly originated auto loans.

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

Home Affordability: Canada vs. US

Homes are unaffordable in the US, but the situation is far worse in Canada.

Point2homes has an interesting set of charts on Home Affordability In Canada vs the US.

Key Findings

  • The average Canadian has to dish out a whopping 56% more to buy a home, or 25% more to rent one compared to ten years ago, but the median wage in Canada only went up 15%.
  • The average home price in the U.S. increased at a much slower rate (24%), while the median income went up by 18%.
  • Since 2008, the Canadian dollar lost approximately 25% of its power compared to the American dollar, going from almost perfect parity to a much lower exchange rate.
  • The affordability crisis worsened in Canada, where the housing market went from “seriously unaffordable” to “severely unaffordable”, but the American housing market remained in the “seriously unaffordable” category.
Real Housing Prices
  • Eight years into the new millennium, the U.S. marched head first into one of the worst economic crises in its history following the bursting of the housing bubble. Canada’s real estate bubble hasn’t yet popped and the country has not yet seen a major decline in home prices, but the Canadian economy experienced its own share of turbulence following the oil price crash from 2014 and the burst of China’s speculative bubble.
  • And now, 10 years after the housing crisis that destabilized the U.S., some analysts claim that Canada faces a similar scenario if it stays the course: household debt currently exceeds 100% of GDP, according to data released by the Bank for International Settlements, the average home price went up 56% in ten years, while the median wage per household only increased 15% during the same period, and loose lending is on the rise.

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

Chart Of The Day: Australia’s Record Household Debt Is A Ticking Time Bomb

The Australian household debt to income ratio has ballooned to shocking levels over the past three decades as Sydney is ranked as one of the most overvalued cities in the world.

According to the Daily Mail Australia, credit card bills, home mortgages, and personal loans now account for 189 percent of an average Australian household income, compared with just 60 percent in 1988, as Callus Thomas, Head of Research of Topdown Charts, demonstrates that record high household debt is a ticking time bomb:

The average Australian credit card bill is roughly $3,272.70 as average income earners spend at least $2,000 a month on mortgage repayments, which has contributed to the affordability crisis, said the Daily Mail Australia. The average Australian holds about a $400,000 mortgage after they put down 20 percent deposit for a $500,000 property. The paper notes that the loan would barely buy a one-bedroom unit in most outer suburbs, as full-time workers take in about $82,000 salary per annum and spend an alarming 40 percent on mortgage repayments.

With household debt at crisis levels, CoreLogic said Australian home prices experienced their sharpest monthly drops in July since late 2011 as declines gathered momentum in Sydney and Melbourne (Sydney and Melbourne cover about 60 percent of Australia’s housing market by value and 40 percent by number). Nationally, the index of home prices dropped .60 percent in July from June, leading to an annual fall of 1.6 percent.

The brunt of the slowdown has been most significant in Sydney, where values were lower 5.4 percent in the year to July, while Melbourne slid 0.5 percent. Home price declines were the sharpest in expensive regions, while the affordable housing segment of the market experienced less stress.

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

BoC: 8% Of Canadian Households Owe More Than 20% Of The $2.1 Trillion In Debt

BoC: 8% Of Canadian Households Owe More Than 20% Of The $2.1 Trillion In Debt

BoC - 8% of Households Owe More Than 20% of The $2 Trillion In Canadian Debt
Canadian real estate debt hit a new high, and the news gets worse as they explain it further. The Bank of Canada (BoC) updated household debt numbers for March. In a speech this week, BoC’s Governor Stephen Poloz also gave further insights on the numbers. The record debt levels are concentrated in a smaller segment of Canadians. These Canadians are now in a “highly vulnerable” position, and they’re f**ked if they don’t start preparing for higher rates now.

8% Of Canadians Have Mortgage Debt Over 3.5x What They Make

In a speech this week, the BoC gave us further insights on the Canadian debt problem, and it’s worse than we thought. It turns out 8% of households have mortgage debt that’s more than 350% of their gross income. This segment of borrower represents “a bit more than 20 percent of total household debt.” BoC Governor Poloz stressed that these households need to understand how “personally vulnerable” they are, as rates rise.

Rising rates are already putting the pinch on households, and it should get worse. The BoC reiterated the “neutral rate,” which is the rate where policy is no longer expansionary, is between 2.5% and 3.5%. Assuming no “shock” to the economy, rates will get there. Currently we’re at 1.25%, so that would mean rates will double over the next few years. You know, if we don’t face a major recession. Then you’re in the clear on rates, but a whole other bag of issues will crop up. On that note, onto those climbing debt numbers.

Canadian Households Owe More Than $2.1 Trillion Dollars

Total household debt hit a new record, but the annual pace of growth continued to decline. The total balance at the end of March stood at a whopping $2.129 trillion, up $3.4 billion from the month before. The annual rate of growth is now 5.25%.

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

“Canada Is In Serious Trouble” Again, And This Time It’s For Real

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 Canadian household had failed to reduce its debt load.

Additionally, the German economist 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 last summer, when the trends shown by Slok three years ago had 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.

And yet despite all these concerning trends, virtually all of these red flags have been soundly ignored, mostly for one reason: the “wealth effect” in Canada courtesy of its housing market grew, and grew, and grew

Looking at the chart above, Bloomberg recently said that:

On a real basis, Canadian housing prices experienced a much smaller, shorter decrease in prices during the financial crisis and a much larger, longer increase in prices during the recovery. When you couple this unfathomable rise in housing prices with near-record high household debt-to-income ratios, the Canadian housing bubble starts to look scary should the tide turn.

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

Oh Canada! Canadians Starting To Feel The Pain of Debt.

Oh Canada! Canadians Starting To Feel The Pain of Debt.

Many Canadians are facing the consequences of spiraling debt. The Bank of Canada has increased its key interest rate three times since last summer, prompting some of Canada’s larger banks to raise their prime lending rates. Forty-seven percent of Canadians are feeling the pinch, indicating they will not be able to meet ordinary living expenses without incurring more debt. More than half say that high-interest rates will make it increasingly difficult to repay existing debts, with 33 percent fear that rising interest rates will force them into bankruptcy.

Easy credit has provided Canadians with a false sense of security and enticed many into the housing market. With household debt already at an unprecedented level, many homeowners will not be able to refinance their current mortgage debt.

Canadians have succumbed to the lure of easy credit. Consumer household credit totaled $2.13 trillion, with residential mortgages making up 72% of that.

Easy credit and rising home prices have created a debt trap for many Canadians, and many face an uncertain future. With little savings to cushion a financial blow, Canadians have good reason to be concerned.

Canada’s household debt has exceeded its GDP for the first time, and most Canadians are living on a precarious edge. Faced with mortgage payments they find difficult to repay, 4 out of 10 Canadian homeowners are without the necessary funds to meet normal living expenses.

One of the problems is that income has failed to keep pace with rising debt. Those with debts beyond their ability to repay will be the most adversely affected.

So far, home prices have continued to increase, masking the overall debt problem. Any economic downturn, combined with little savings, could cause people to lose their homes. Homes can be difficult to sell in a tight market, causing delinquencies to rise.

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

Consumers In Surprising Places Are Borrowing Like Crazy

Consumers In Surprising Places Are Borrowing Like Crazy

The Money Bubble is inflating at different speeds in different places. But apparently no culture is immune:

Household Debt Sees Quiet Boom Across the Globe

(Wall Street Journal) – A decade after the global financial crisis, household debts are considered by many to be a problem of the past after having come down in the U.S., U.K. and many parts of the euro area.But in some corners of the globe—including Switzerland, Australia, Norway and Canada—large and rising household debt is percolating as an economic problem. Each of those four nations has more household debt—including mortgages, credit cards and car loans—today than the U.S. did at the height of last decade’s housing bubble.

At the top of the heap is Switzerland, where household debt has climbed to 127.5% of gross domestic product, according to data from Oxford Economics and the Bank for International Settlements. The International Monetary Fund has identified a 65% household debt-to-GDP ratio as a warning sign.

In all, 10 economies have debts above that threshold and rising fast, with the others including New Zealand, South Korea, Sweden, Thailand, Hong Kong and Finland.

In Switzerland, Australia, New Zealand and Canada, the household debt-to-GDP ratio has risen between five and 10 percentage points over the past three years, paces comparable to the U.S. in the run-up to the housing bubble. In Norway and South Korea they’re rising even faster.

The IMF says a five percentage-point increase in household debt over a three-year period is associated with a hit to GDP growth of 1.25 percentage points three years down the road. The historical record suggests that large debts lead to a short-term economic boost but long-term struggles, as a greater share of the economy’s resources go to servicing the spending binge associated with high debts. The IMF also finds rising household debts are associated with greater risks of banking crashes and financial crisis.

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

Debt on Track to Destroy The American Middle Class

Debt on Track to Destroy The American Middle Class

Economists report the household debt to be at its highest in decades.  Yet, at the same time, we are being told that the economy is doing great. Does anyone see a serious contradiction?

In fact, the current economy only favors the wealthy owing to their flourishing financial assets such as stocks and bonds. Owing to the lack of real assets such as property and commodities, the middle and lower classes are becoming overwhelmed due to the serious consequences of the spending/debt cycle.

American consumers have a collective outstanding household debt of about $13.15 trillion of which nearly $1 trillion is the credit card debt alone, households are truly on a debt binge. These figures should be a wake-up call to all the Americans. The convulsive household debt has surpassed the bubble of 2008 and is still escalating. The economy may not be doing so great, after all.

Compared to 2008, the automobile credit balances have increased to $367 billion whereas the outstanding student loans are around $671 billion. Moreover, 67 percent of household debts belong to consumer mortgages. In 2016, twenty-five percent of all the Americans purchased a new or used vehicle and two-thirds of them are repaying through high-interest, long-term loans.

In fact, the consumer debt has exceeded their income for majority of the Americans.

Consumers have become accustomed using easy credit to maintain a lifestyle unaffordable for them otherwise. If this trend continues, and facts indicate that it will, we will be facing a monumental credit crisis in the near future.

A huge portion of credit card debt is the interest. Credit cards are a convenience and consumers readily pay for the privilege. However, it is necessary for consumers to know how credit card interest actually works.

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

Household Debt Rises By $572 Billion, Ends 2017 At All Time High

After we first reported last week  that US credit card, student and auto debt all hit record highs in December of 2017…

… it should not come as a surprise that according to the just released latest quarterly household debt and credit report  by the NY Fed, Americans’ debt rose to a new record high in the fourth quarter on the back of an increase in virtually every form of debt: from mortgage, to auto, student and credit card debt (although HELOCs posted a tiny decline).

Aggregate household debt increased for the 14th straight quarter, rising by $193 billion (1.5%) to a new all time high, and as of December 31, 2017, total household indebtedness was $13.15 trillion, an increase of $572 billion from a year ago – the fifth consecutive year of increases – equivalent to 67% of US GDP, versus a high of around 87% in early 2009. After years of deleveraging in the wake of the 2007-09 recession, household debt has risen more than 18% since the trough hit in the spring of 2013.

Some more big picture trends:

  • Mortgage balances, the largest component of household debt, increased by $139 billion during the quarter to $8.88 trillion from Q3 2017.
  • Balances on home equity lines of credit (HELOC) have been slowly declining; they dropped by another $4 billion and now stand at $444 billion.
  • Non-housing balances, which have been increasing steadily for nearly 6 years overall, saw a $58 billion increase in the fourth quarter.
  • Auto loans grew by $8 billion to $1.22 trillion
  • Credit card balances increased by $26 billion to $834 billion
  • Student loans saw a $21 billion increase to $1.38 trillion

There were some red flags of caution: confirming recent negative data from Wells Fargo, and suggesting that the housing recovery is stalling, mortgage originations were at $452 billion, down from $479 billion in the third quarter.

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

 

Canada Home Values Hit “First Quarterly Decline since Q1 2009” as Household Debt Binge Hits New High

Canada Home Values Hit “First Quarterly Decline since Q1 2009” as Household Debt Binge Hits New High

How exposed are over-indebted household to rising interest rates?

Household debt in Canada rose to a new record of C$2.11 trillion in the third quarter 2017, up 5.2% from a year ago and up 10.7% from two years ago, Statistics Canada said on Thursday in its quarterly report on national balance sheets. Mortgages accounted for 65.6% of the total. Canada’s infamous household-debt-to-disposable income ratio, one of the highest in the world, rose to a breath-taking record of 173.3%.

The ratio means that households, on average, owed C$1.73 for every dollar of after-tax income earned. This chart shows how the indebtedness in relationship to after-tax income has soared since 2001, when Canada’s housing boom took off in earnest:

While US households “deleveraged” somewhat during the Great Recession, mostly by defaulting on their debts when housing crashed and jobs vanished, Canadian households barely took a breather as there was no housing bust in Canada. Hence the consistently rising and record-breaking debt-to-disposable income ratio above.

Disposable income in 2016 got hit by “a significant downward revision,” based on new data received from Canada’s tax collection agency, Statistics Canada said. This resulted “in an upwards shift to this ratio.”

The debt-to-disposable-income ratio of 173%, scary as it is, is just a national average. But it’s not normally the top of the income categories that get in trouble. It’s the lower categories.

In a separate report also released on Thursday on the distribution of income and assets, Statistics Canada added to this debate:

Economy-wide debt-to-asset and debt-to-disposable-income ratios can mask the financial risk associated with increasing debt for a given group of Canadian households.

In 2016, the national average debt-to-disposable-income ratio was 172.1%. Decomposing this by household disposable income quintile reveals that the debt-to-disposable-income ratio for the bottom income earning households was 333.4%, while the debt-to-disposable-income ratio for the top was 128.3%.

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

Why Doesn’t This Household Debt Worry Anyone?!

Why Doesn’t This Household Debt Worry Anyone?!

With all the attention going to political tensions between the USA and North Korea and the interest rate policies and monetary policies established by the various central banks around the world, we would almost forget to keep track of how the ‘real’ economy is doing. And then we aren’t talking about GDP results or theoretical consumer confidence levels, but about how the average households in the United States are doing with a special attention to the debt levels.

Because consuming goods is one thing. Being able to afford them is another thing and if your consumption pattern and consumption economy is based on quicksand, then one simple economic shock might cause the entire consumption-based economy to collapse.

The Federal Reserve Bank of New York has provided an updated net household debt situation, and the chart looks pretty alarming. After the Global Financial Crisis has hit the USA, the total debt decreased from 12.7 trillion dollar to 11.3 trillion dollar by 2013. Whilst this seems like a marginal move fueled by lower mortgage debt, it’s actually pretty impressive considering the 125 million households in the USA reduced their net debt by $11,200 per household.

Source: NY  Fed

However, since 2013, the fears for another financial crisis have decreased as the US banks seemed to be fine as most were passing the stress test of the Federal Reserve with flying colors. Meanwhile, the focus of the crisis and monetary world shifted towards Europe where Greece, Italy and Spain were trying to get their public finances in order.

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

“Canada Is In Serious Trouble” Again, And This Time It’s For Real

“Canada Is In Serious Trouble” Again, And This Time It’s For Real

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

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…

Olduvai IV: Courage
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Olduvai II: Exodus
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