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Household Debt Soars in Canada, “Stability” at Risk
Wolf Richter www.wolfstreet.com www.amazon.com/author/wolfrichter
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.
And how did that impact households?
For the third consecutive quarter, disposable income increased at a slower rate than household credit market debt. As a result, leverage, as measured by household credit market debt to disposable income, reached a new high of 163.3% in the fourth quarter. In other words, households held roughly $1.63 of credit market debt for every dollar of disposable income in the fourth quarter.
For the moment, there is still one saving grace to this rising mountain of debt: interest rates have been coming down for years. So the debt service ratio, which measures household interest expense as a proportion of disable income, has been declining as a function of interest rates, though it inched up in Q4 to 6.8%
The chart shows how the ratio of debt to disposable income (red line, left scale) has been rising with a few exceptions, while the debt service ratio (blue line, right scale) has followed interest rates up and down:
The ratio of debt to disposable income picked up speed from 2001 on. It blew through the financial crisis even as US households were whittling down their debt by deleveraging and defaulting. Canadian households didn’t even stop to breathe. They kept spending and piled on debt at an astounding rate. Their incomes rose also, but not nearly enough. It wasn’t until 2011 that the red-hot growth rate started to lose some of its fire, bumping into all sorts of resistance from reality.
With interest rates getting pushed lower year after year, interest expense as a percent of disposable income – the debt to service ratio – has been declining. For the moment, these low interest rates keep the whole thing glued together.
And if interest rates ever rise even by a smidgen? The blue line would do what it started doing in 2006. It would roar higher. With consumer indebtedness at these levels, even a small increase in interest rates will make a big difference in the interest expense consumers would have to fork over.
The Bank of Canada – kicked into panic mode by the collapse of oil prices, the faltering housing market, vulnerable banks, and other nagging issues, including the indebtedness of the consumer, which it pointed out as a risk factor last year – suddenly cut its benchmark interest rate in January. In the past, it communicated such moves in advance. In January, it was a surprise move that shocked the markets.
Today, Rhys Mendes, Deputy Chief of the Bank of Canada’s Economic Analysis Department, told the House of Commons finance committee that the central bank would “not necessarily” be pressured into following the Fed’s rate increases this year. “The bank targets inflation in Canada, and decisions regarding monetary policy in Canada would be based on the outlook for inflation,” he said, presenting the central-bank smokescreen for keeping rates at near zero for other reasons.
The Bank of Canada will have trouble ever raising rates, regardless of the distortion and mayhem near-zero rates are causing. Households can no longer afford higher rates. They have too much debt and not enough income. Higher interest payments would eat into spending on other things. Higher mortgage rates would crash the still magnificent home prices. Consumers would buckle under their burden and default. Not to speak of the already struggling oil companies. And then there are the banks that have lent with utter abandon to all of them.
Years of low interest rates encouraged this dreadful level of leverage. Now it’s an albatross around the neck of the Bank of Canada, and for decades to come. And for the economy, it’s a high-risk burden that could quickly, as Equifax suggested, blow up.
Gravity is already very inconveniently inserting itself into Canada’s incredible housing boom. Read… Housing Construction Skids in Canada, but Crashes in the Oil Patch
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Midas , I'm afraid he may be right... My wife has friends (new immigrants in the last 5 years) to Kanada ,, they are nurses and they are totally blind to their surroundings... I plead with them last year to sell their house in Vancouver and rent rather than trade up... they thought I was nuts... when they are crushed in the coming RE downturn they'll find out how difficult debt is up there ... they'll be lucky to run back to the Philippines with enough savings to buy a small place.
Touchay "Midas", however, you've apparently never watched "made in Kanada" tv shows...uhg!!!
What?, i used to enjoy Stargate...
I have. I agree. Uhg! Canadian TV seems to spend a lot of time saying, "Look! We are not the USA!" One of my favs- This Hour Has 22 Minutes. Canada has so much going for it but her people spend waaay too much time worrying about how not to appear second to the US. If they would stop, they could be great.
Second to US? No, Mexico is second. Canada is third. They need to realign their worries.
Trailer Park Boys, Little Mosque on the Prarie, so unAmerican
As to Canadian inflation: Our co-op just saw property taxes rise over 10% this year and it's apparently going to do the same for the next 3 years to bring taxes in alignment with increases in property values. I'm seeing almost a 20% increase in the grass-fed beef that I buy directly from the farm.
Inflation is there in what you have to buy / pay (the 'needs'), not in the 'wants'. the only thing from stopping us from becoming like Zimbabwe is that the global labour market pressures are keeping wages down. Otherwise, to the moon Alice!
That's both deflation and inflation hitting at the same time.......deflation from tax increases (runaway gov't spending) and inflation in services and commodities (due to falling loonie).
Both are very bad omens for disposable income in the future.
I try not to dipose of my income.
Better to exchange it for something tangible.
Biflation; increased costs of all your essentials while your income, savings yield, etc drop. Fixed income people or those who have a COLA linked to the CPI have had their faces ripped off since the BLS has handed them a zero or near zero COLA.
Economic schisms, within the crashing oil shockwave, and the swirl-o-gram grabs hold.
This fiat driven inception should be shutting down in 3...2...1...
But funnily enough one of the few countries NOT to use QE so far, and one of the only countrie close to running a budgetary surplus. Go figure.
Oh .. and if they want inflation it is coming. Depreciate your currency 20% quickly ... and prices will RISE soon enough.
160,000,000,000 was the Canadian bailout if recall correctly, as for QE in time my friend, as previously stated our government is very quiet about everything hence the quiet dicktastorship we find ourselves in today. Even our central banker has no clue and has been chastised by almost every expert and deemed an oaf.
For those of you taht think Canadian Banks did not need/get a bailout here you go;
Study Reveals Secret Bailouts to Canadian Banks
You're just revomiting the official vomit...difference is, you're obviously just too Kanadian to realize it !
Moar debt? That's just moar stupid.
I have no debt, which is moar smarter.
Grimaldus
Canada? That's that little country next to Rwanda, isn't it?
Canada once played at being Bedord Falls.
Now, it's just another Pottersville.
I think you mean Zimbabwe - as in the United Zimbabwes of America.
Gold dog: You are uninformed.
Canada is America's largetst trading partner.
American trade with Canada is roughly the same that it trades with the entire European Union.
You can't spell oudinot without "idiot".
Please get your funny-bone checked for nerve damage......it was a joke.
Yes, it was only a joke. A lousy joke. A tired old joke. An uninformed and witless joke. But a joke nevertheless...
The biggest Canadian joke?
S. Harper.
So who is better?
There appears to be no other dildos available at this time, we do have a drama teacher who is of political royalty, i'm guessing he will be our next elite dildo
You give him too much credit calling him a Dildo, a Dildo can do something right...Political Royalty not so much.
Aye?
"centerline"...I think you mean " EH! "
Wasn't sure. Changed it actually from Eh to Aye. My bad!
Eh vey!