Canada’s Consumer Debt Growth Will not End Well
By Walter Kurtz, Sober Look
Canada continues to face rising consumer debt levels. Since the post on Canadian housing risks (here), we’ve gotten a number of comments that Canada’s housing is not overpriced (for example if measured in terms of gold). And since there is no “subprime lending” in Canada, consumer debt is not a problem because delinquencies will stay low.
The authorities have since taken some steps to curb potential housing speculation (see discussion). But it seems that Canadian consumers have caught the US debt bug as consumer leverage becomes an increasing concern – particularly for BoC (the central bank). And it’s not just about mortgages.
The Epoch Times: – The average non-mortgage total debt of Canadian consumers rose once again last quarter, continuing the trend of the highest debt levels seen to date.
According to a report by credit analysis company TransUnion, the average consumer’s total debt (excluding mortgages) rose by $192 in the second quarter of 2012 to $26,221, a 0.74 percent increase compared to the previous quarter, and a 2.41 percent rise compared to the same quarter last year.
Auto loan debts had the highest rate of increase compared to other credit products, with a rise of 13.25 percent compared to Q2 last year, and 3.67 percent compared to Q1 this year. The average credit card borrower debt declined by 0.93 compared to the same quarter last year, but increased by 2.7 percent compared to the previous quarter this year. Lines of credit and installment loan borrower debts also increased in Q2 2012 by 0.4 percent and 0.95 percent compared to Q2 2011, and 1.13 percent and 2.37 percent compared to Q1 2012, respectively.
Canadian consumer leverage – debt as percentage of personal disposable income – has now far outpaced that in the US, as Americans continue the deleveraging trend (discussed here).
Source: BNP Paribas
At the same time Canadian banks, who pride themselves for being quite resilient in the face of the financial crisis in 2008, are really enjoying this demand for consumer lending products. Canadian banks’ profits are soaring and they are increasing dividends.
Bloomberg/BW: – Royal Bank of Canada, Toronto- Dominion Bank and Canadian Imperial Bank of Commerce raised their dividends after reporting third-quarter profits that beat analysts’ estimates on consumer lending.
Royal Bank, the country’s biggest lender, said profit for the period ended July 31 rose 73 percent to a record C$2.24 billion ($2.26 billion). Toronto-Dominion, the second-biggest bank, said net income climbed 14 percent to C$1.7 billion, or C$1.78 a share, while CIBC said profit rose 42 percent to C$841 million, or C$2 a share.
The three Toronto-based lenders join Bank of Montreal (BMO) and Bank of Nova Scotia (BNS) in raising dividends this week as gains in consumer lending and higher trading revenue helped the world’s soundest banks report earnings that topped estimates.
All this is happening at the time when the global slowdown and declining demand for resources (which is Canada’s strength) are threatening to dampen Canada’s economic growth. The combination of rising consumer leverage and easy profits in the banking system (remember the good old days in the US?) have the makings of a potentially nasty economic downturn for Canada.
11 Comments
This appears to be following a similar pattern to many other developed countries (eg US, Netherlands, Australia, Spain). Although its tough to predict how long the trend will last, the general conclusion is that when prices turn south (and they will), the ensuing fallout will be widespread and relatively severe.
It starts with the credit cards, if you want to stop spiraling credit card debt, incentivize the paying down of debt. I’ve had two of my comments on various Canadian blogs deleted when all they did was offer a solution. So now instead I’ll just link to the solution on my blog. (no sales pitch, no ads, just a solution).
http://www.debtneutrality.blogspot.com/2012/08/canadas-consumer-leverage-growth-will.html
The debt solution is right there in front of you if you want it.
It looks like a country will have a housing bubble in a loose monetary environment if the local market structure makes such a bubble possible, as it did in the USA, UK, Ireland, Spain, and Japan, and does in Canada, Australia, China, etc. Countries like Germany where personal ownership is not encouraged and renting is the norm, do not seem to have housing bubbles. They just lend the easy money out to the countries with bubbles.
Germany also requires that you put down 20%, something a lot of people can’t afford. Rents of course are going up with home prices so renting is no recipe against housing bubbles, and in cities like Hamburg or Munich prices are exploding, but this is mainly due to scarcity of space.
Not to worry – just deregulated and allow free markets to work their magic!
Canadian short-term yields are currently pretty high (their 2yr is around 1.15% versus 0.25% in the US). So far, the Bank of Canada has resisted cutting rates, and has actually maintained a pretty hawkish tone. But if that Sober dude is correct, and I think he is, then it is only a matter of time before the BOC reverses course, in which case the Cda 2yr bond would be a great buy.
http://www.nasdaq.com/article/canada-government-june-budget-deficit-shrinks-on-spending-cuts-20120831-00234
“In its 2012 budget, introduced last March, the Conservative government unveiled a plan to cut program spending by up to C$5.2 billion annually over the next five years in order to return to a budget balance by mid-decade, or the fiscal 2015-16 year.”
Based on what I’ve learned from this site, it doesn’t look good for the Great White North.
I also was trying to apply some MR to Canada.
Canada is running trade deficits and is cutting spending with a goal to balanced budget and in addition has created policies to slow housing which was too hot.
It would appear that these measures will cause a GDP decline. The BoC does have what I think is a continuous QE in that they have a policy to purchase 20% of all treasuries up from 15% as of last fall.
However the fin min did not hesitate to increase spending when called by other G nations so one would expect similar action.
However, the Q&A today with fin min suggests he likens government debt to household debt
Australia has its own version of the “Subprime Mortgage” scandal.
http://www.macrobusiness.com.au/2012/08/australias-sub-prime-mortgage-scandal-grows/
Bubble, bubble, bubble.
Canada’s housing bubbles tend to be popped by rising interest rates because mortgages are generally 5 years or less with an increasing proportion on 1 year. Otherwise, I would wait to see businesses under stress as the next trigger. CAD can be quite volatile which helps to absorb some of the shock. But, in the same way that no one predicted JGBs at 1% for 20 years, housing affordability is quite average at the current 5-year+1.5%, so the bubble may not pop, but I wouldn’t expect housing to be a great investment for the next 10 years (but then again neither are 10 year bonds!).
I’d like to see avg debt payment vs. income – taking into account interest rates. For example, the US is in far better shape today than a debt to income chart would have you believe because interest rates are so much lower than they’ve ever been. (another advantage of lower interest rates is that more goes to equity earlier in the loan.) I’m pretty sure the above chart comparing the US to Canada would have the blue line far higher at the bubble peak, and Canada only now approaching that peak, but not there yet. Canada recently had a “race to the bottom” with rates hitting 2.99%, but since then a couple of banks have raised them to over 5%. So they can certainly pop their own bubble if they raise rates, but I suspect the bubble has more air left to go