October 30, 2012
Rising Household Debt in Canada is Influencing Government Policy
One of the latest reports published by Statistics Canada is entitled National Balance Sheet Accounts, Second Quarter 2012. It could hardly sound like more formidable reading.
Contained within its pages, however, is one of the most important statistics on the Canadian economy – the household debt to disposable income ratio.
The fact this figure has risen so high and is continuing to climb is influencing a great deal of government policy.
There was an outcry at the end of the first quarter when the debt-to-disposable-income ratio reached 161.8%. That was in the same territory that burst housing bubbles in other nations at other times, including the U.S. and U.K. It inspired our Minister of Finance to tighten mortgage rules in order to take some of the steam out of Canada’s hot housing market.
Through the second quarter of this year, the debt situation for Canadian families became even worse. The ratio climbed another notch to an all-time peak of 163.4%.
There’s little doubt the low interest rate policy of the Bank of Canada (BOC) has caused the rising tide of debt. Mark Carney, Governor of the Bank of Canada (BOC), is in a bind. In a weak global economy, he needs to keep providing stimulus. At the same time, he doesn’t want to see families sink under their credit obligations. Will he be forced to raise interest rates to head off the problem before it becomes much worse? That possibility has become slightly more likely.
Most of the discussion about household debt focuses on housing markets. What’s often not mentioned, however, is how low interest rates are helping to pump up auto sales. The two accompanying charts show what has been happening in that sector.
Annualized total unit sales of motor vehicles will soon match two other exceptionally strong periods, 2002 and mid-2008, before the start of the recession in the second half of that year.
(Auto sales as reported by Statistics Canada are not seasonally adjusted, so they have to be shown as 12-month moving averages to be comparable from one period to the next. Keep in mind that in December, the 12-month moving average is the annual total.)
It’s interesting to note that the two bellwether sectors of the economy often reach their zeniths at opposite times of the year. Home sales usually peak in the spring. Auto sales are often strongest in the fall when the newest models are introduced. This isn’t quite as true as it used to be since cash-back and other incentive programs can alter the timing of demand.)
But let’s return to the household debt problem in relation to residential real estate. There are currently two headline concerns about the Canadian economy and they’re related – the historically high level of Canadian household debt and the fear that the housing market will soon be falling into correction.
The latest numbers from the Canadian Real Estate Association (CREA) show a resale market that is weakening, but in an orderly manner so far. Unit sales in September of this year were -15.1% compared with September of last year, but the average price of homes sold through the multiple listing service was still modestly positive (+1.1% year over year). Leaving Vancouver out of the mix, the average resale home price increase was +3.4%.
The BOC’s Governor is on the speaking circuit telling businessmen the economy is in better shape than they may suppose. This is especially true given how well some sectors in the U.S. are doing. U.S. housing is starting to perk up and vehicle demand has been even hotter there than here.
Mr. Carney is afraid the Canadian business sector may take some of the negative news too much to heart. For example, there’s way too much talk about the U.S. fiscal cliff. Come the end of this year, Washington will find a means to skirt it, roadrunner-style, by one means or another.
If the negativity causes firms to curtail investment spending, then there will be a third force working against the overall Canadian economy.
In fact, the BOC’s latest (Fall 2012) Business Outlook Survey offered some forewarning on that score. When asked whether or not they plan to spend more on machinery and equipment over the next 12 months versus the prior similar period, the nation’s top executives were almost evenly divided. 37% said they will spend more; 34% opted to stand pat; and 29% projected cutbacks. Previous BOC outlook surveys have been much more upbeat on the subject of future investment.
(12-month moving averages annualized)
(12-month moving averages annualized)