CGA-Canada released their latest report on household debt in Canada… and it seems, we not only like other peoples money… we like to spend it.
For my loyal readers, I’m sure this news comes as no surprise, we’ve been discussing this ad nauseum… but you should read the report anyway, cause there is a ton of interesting stuff in there and also looks at it from several angles that I have yet to explore (you’ll need to set aside a couple hours though, it’s a big’uns!).
I read through it this evening, and figured I’d offer those fence sitters a bit of a sneak peak at it’s contents, as well as discuss some of it’s findings. So, without further ado, lets do it, to it.
A couple of it’s more referred to points in the media is that on a per capita basis, each and every Canadian owes $41,740 in consumer debt (no province by province breakdown unfortunately). Consumer debt is debt that is not backed by assets, so does not include debt arising from things like mortgages. The other is that the debt-to-income ratio is sitting at 144.4%. Both those figures are all-time highs… which if that wasn’t bad enough, in case of the latter figure the report was obviously prepared before the most recent figures were released, it’s now at 146.2%.
If that wasn’t troubling enough, these figures have continued escalating even during the recession… behavior not normally observed. During the prior recession (’90/’91) consumer credit contracted by -2.6%… this past year it’s not just expanded (+5.6%), but did so at a rate even greater than the historical average (+4.7%). Even mortgage debt, which while not expected to contract, still expanded by an above-average amount (+5.9%).
Even the kingpins of conspicuous consumption to the south of us figured it out and pulled back on credit expansion during the economic turmoil… but Canadians paid no heed to the warnings and continued spending full-steam ahead. When the chickens come home to roost it may very well “be different here”… but not in a good way.
It seems this appetite for debt has not just arisen since the downturn (or at least this downturn…), after historically tracking quite closely, debt growth took off in a big way and shifted way up relative to GDP after 2003…though I’m sure the timing of this and central bank interference hitting all time highs is a mere coincidence. Yup, coincidence. Nothing to see here!
Getting back on track. There were many other interesting findings in their report. Among them was the rise of LOC financing, and really just revolving credit in general. And in case you just glanced at the above graph without really letting it sink in, bear in mind those figures are inflation adjusted… yeah, that is just terrifying.
There is significantly more LOC debt alone now there there were in ALL forms of consumer debt not just historically… but as recently as a mere 6 years ago! And the other forms of credit haven’t really fallen in that time, in fact credit card debt has almost doubled too. Per capita consumer debt, even when inflation adjusted, has roughly DOUBLED in just 5 years.
And we haven’t even started talking about the dangers lying ahead considering we know interest rates cannot go any lower… and with all the debt being rang up and global uncertainly, bond yields are destined to go way up from here once that market starts flooding, which of course drives up interest rates.
You see the real danger of revolving credit is that it only requires you make largely interest-only payments, this of course allows the debtor to extend themselves further with no need to pay back much if anything… but the rates they pay are also usually floating (tied to the prime rate). Knowing that prime is at it’s all-time low, of course means borrowers can leverage themselves like never before, and evidently they’ve obliged. When interest rates stay ultra-low, piling on more debt is no problem.
When rates start heading up though, the borrower still owes just as much money as before, but with a higher rate, that means he has to pay more to service the debt, which really throws a wrench into the gears. The borrower now much not only stretch to make the new payments, but cannot borrow either… which obviously limits consumption, and that has a nasty ripple effect on the economy when so many are so deeply indebted. That sort of scenario leads to a situation called “contraction”… and that concept has been keeping the likes of Mark Carney up at night the last few months.
The report isn’t all bad news, at least for Alberta. There is an interesting little nugget that the province has a rather remarkable savings rate in ’08 or 13.7%… more than double the national average. I imagine many in older generation (or anyone who bought their homes pre-’06 and didn’t treat it like an ATM in the mean time) have done VERY well for themselves during the boom time… on the other hand many in the 35-and-under bracket, maybe not so much. We also more than double the national rate for growth in consumer bankruptcies too after all.
One last interesting factoid was cited early in the report, it had figures on the percent of vehicle purchases made using credit (it actually uses cents per dollar, but same difference)… in 2008 it was 39%… in 2009 it was 75%. It practically doubled from one year to the next.
Evidently those buying cars during the recession were in FAR less capable financially to make such a purchase than those did buying pre-recession. Economic uncertainly should scare those less capable away from major purchases leaving only those that are secure… not send the unqualified to buy in droves, and at increased leverage. But alas financial responsibility has long since become passé, when even those who fully know better are telling everyone we need to spend ourselves out of debt. One final depressing observation regarding the lure of debt I guess.
Which kind of reminds me of something I learned growing up. While my parents may have failed to instill in me much in the way of social graces, or social skills of any variety really… they did instill a healthy distaste for debt.
They believed that if you didn’t have the money in your pocket, you don’t buy it. I remember them saying that if you’re over 30 and can’t buy a car with cash, you can’t afford that car. That philosophy extended to pretty much everything short of a house… that you can borrow for, but even then should be paid off as soon as possible. And we were not rich by any means, but they did alright and lived well within their means, which has served them well.
I like to think that rule stuck with me. Mind you, I’m not saying I always had a firm grasp of the worth of a dollar right away. That took several years of living on my own and right into my early 20′s… but as much money as I wasted in that time (and that is much more than I’d like to admit), I never once spent money I didn’t have. Blew lots I did have, or had, I guess, but that fear of debt kept me honest. When I was short, I did without.
That seems to be a lesson lost of many of my generation. They seemed concerned mainly with consuming now and keeping up with the Jones’. Buying shit they don’t need, with money they don’t have, to impress people they don’t like. No concern for what could happen, as long as they can handle the debt servicing costs in the now that is as far as their vision extends.
The problem with that outlook is that it only works as long as the music continues to play the same tune… when the song changes though, things tend to fall apart in a hurry.
