Tighter mortgage rules might be ‘insufficient’ to curb household debt

By Erica Alini - Tuesday, February 12, 2013 at 7:00 AM - 0 Comments

Targeted rules are often a better way to deal with a buildup of risk in the economy than monetary policy, BoC Deputy Governor Timothy Lane said in his prepared remarks for a speech he gave today at Harvard University. So, for example, if households have gone on a borrowing binge and house prices are inflated, you’d be better off tightening mortgage regulations than raising interest rates. Tougher mortgage rules target the housing market specifically; an interest rate hike would also hit exporters by causing your home currency to appreciate—unless other countries rein in their monetary policy as well (which ain’t happening any time soon in the real world).

This is a well-known policy stance of the BoC. Governor Mark Carney just told all this once again to British MPs last week: Canada is better off curing its household debt problem with a healthy dose of mortgage-rule tightening rather than an rate raise, which would come with serious side effects.

And yet, if the more sophisticated, light-touch treatment doesn’t do the trick, the BoC might have to use its rougher, heavier medicine, Lane told his distinguished Harvard audience today:

“If such targeted prudential measures turned out to be insufficient, monetary policy could also be used, within a flexible inflation-targeting framework, as a complementary instrument to address financial imbalances.“

Canadians have slowed down the pace at which they’re taking on new debt and there’s plenty of evidence the residential real estate market is cooling. But, Lane noted, that could still turn out to be a temporary improvement:

“it is possible … that household spending could regain momentum”

After all, if interest rates stay at rock bottom, borrowing will stay cheap.

Half of Canadians are worried about their finances

By Tamsin McMahon - Thursday, January 24, 2013 at 1:52 PM - 0 Comments

The Canadian Institute of Chartered Accountants has released a new survey on the state of Canadian household finances and depending on whether you’re a glass-half-full kind of person or the pessimistic type, you can take the results as a sign that Canadians have a pretty good a handle on our money, or that our household debt problem isn’t getting any better.

Among the findings is the fact that more women worry about money than men: 55 per cent versus 45 per cent.

Those aged 35-44 worried significantly more about money than those of retirement age: 62 per cent to 35 per cent. That may not come as a surprise, since those aged 35-44 are the demographic most likely to include parents with young children and big mortgages. But it also seems like a good sign that Canadians aren’t heading into their retirement completely broke (though how much of their financial nest egg is based on the current value their homes wasn’t part of the survey).

Meanwhile, half of Canadians said paying down their debt was a high priority — which means that long-term low interest rates have turned half of us into profligate spenders, or have helped half the country get tough on our debt. It might be the latter, considering less than half of those surveyed said they were concerned about lowering their interest rates.

Another 59 per cent said that buying only what they could afford was a high priority. This sounds great but it also means 41 per cent of us like to buy things we can’t afford. That’s backed up by the fact that just 38 per cent said that saving was a high priority.

At the very least, it seems the consumer-driven economy may not be headed over a cliff anytime soon.

‘Highly leveraged’ is not what you want to be right now

By Erica Alini - Thursday, December 13, 2012 at 11:46 AM - 0 Comments

Despite significant mortgage rules tightening; despite repeated warnings by the central bank and politicians; despite admitting to being concerned about the “fiscal cliff” and all the uncertainty around the U.S. economy, Canadians are still borrowing galore. Families now owe an average of over $1.64 for every dollar of after-tax income they bring in, Statistics Canada said today. The ratio of household debt to disposable income climbed 1.3 per cent between July and September, up from 163.3 per cent in the previous three months.

The stricter rules on lending and the policymakers’ alarm bells—not to mention the prohibitive cost of housings in many areas—have only succeeded in slowing down the pace at which Canadians are piling on loans. But household keep wading deeper and deeper into the red. Canadians’ equity in their homes edged down, in the third quarter as mortgage debt grew faster than the value of real estate.

Source: Statistics Canada

Continue…

The indebted, border-hopping Canadian shopper

By Erica Alini - Thursday, November 22, 2012 at 10:10 AM - 0 Comments

Canadian retail sales were essentially flat in September, Statistics Canada said today. In terms of prices, sales edged up for the third consecutive month but only by a meagre 0.1 per cent, below the consensus forecast of a 0.5 per cent increase. In terms of volume, retail activity was flat.

With economic growth hovering around a modest two per cent, household balance sheets deeply in the red and the housing market cooling in many areas of the country, Canadian shoppers’ lack of enthusiasm is hardly surprising.

But there might have been another reason for nearly flat sales in September. As Scotiabank economists Derek Holt and Dov Zigler wrote in a note to clients before StatsCan’s release:

Continue…

Why Canadian homeowners are likely just as vulnerable as Americans were

By Ben Rabidoux - Wednesday, August 22, 2012 at 3:20 PM - 0 Comments

Ben Rabidoux is is an analyst at M Hanson Advisors, a market research firm, where he focuses on Canadian mortgage and credit trends and their implications for the broader economy. He blogs regularly about the housing market at The Economic Analyst. Follow Ben on Twitter @BenRabidoux. 

If you listen to our banks, Canadian homeowners have nothing to worry about. According to Scotia’s latest housing outlook, for example: “Canadian household balance sheets remain in reasonably good shape, with homeowners’ equity in real estate assets averaging 67% compared with 41% in the United States.” In other words, if the average Canadian family were to sell their house at current market prices and pay off their mortgage, they’d be left with an amount equal to 67 per cent of the value of the house. An American household, by contrast, would be left with a mere 41 per cent. Sounds reassuring, no?

It certainly does. But how useful is it to compare Canadians’ equity in an overheated housing market to Americans’ equity in a post-bust real estate wasteland, where homeowners are paying off mortgages on houses whose value has collapsed?

Continue…

Carney points to rising household debt as main domestic threat to Canadian economy

By Alex Ballingall - Thursday, April 19, 2012 at 9:12 AM - 0 Comments

Bank of Canada Governor Mark Carney is raising flags about rising household debt in Canada. Speaking in Ottawa Wednesday, Carney pointed specifically to the increasing use of home equity lines of credit (HELOCs), which Canadians are using mainly to pay down higher interest debt, or for everyday spending.

“Like any financial innovation, home equity lines of credit have both positives and negatives associated with them,” Carney told reporters in Ottawa, quoted by the National Post. “The issue, as with any debt, is if these innovations or this access to debt is taken too far.”

The central bank’s quarterly Monetary Policy Report, which was released Wednesday and details growth forecasts and risks to the Canadian economy, outlines the growth in HELOCs and mortgage refinancings. These surged to $64 billion in 2010, up from just $8 billion in 2001. In the report, the Bank warns that the increasing propensity to spend out of home equity finances may expose many Canadians to a decline in housing prices.

“It contributes to a broader issue where some Canadian households are becoming overstretched,” Carney was quoted as saying by the Globe and Mail. “Canadian households as a whole are being overstretched, which creates risk for the economy.”

Household debt and the Bank of Canada’s anxiety levels—in a graph

By Erica Alini - Wednesday, April 11, 2012 at 3:03 PM - 0 Comments

It’s been years since Bank of Canada governor Mark Carney first started warning about Canadians piling on too much personal debt. Rising household debt, after all, has been the most dangerous byproduct of his low interest rate policy, which was initially designed to help Canada sprint out of the Great Recession––and, later on, partly dictated by the need to help sputtering Canuck exports. Right from the get-go, though, Canadians haven’t been listening. As the situation became more dire, so did the Bank’s warnings. Today Canada’s ratio of household debt compared to disposable income is inching toward 160 per cent, the peak seen in the U.S. and the U.K. just before their respective housing busts. (In the last three months of 2011, the debt-to-income ratio declined somewhat–not because Canadians stopped taking on debt, but because income levels also rose during the same period.) Carney is still at it. Last week, he finally raised the prospect of raising interest rates, cutting people off from all that cheap money, even as the Fed down south sticks to near-zero rates.

In the graph below, we’ve charted debt-to-income ratios, alongside some increasingly alarmed quotes from BOC governor Mark Carney or other Bank officials.

Click on the chart to open a full-size version of the graph in a new window.

Source: Statistics Canada. Photograph: Sean Kilpatrick/CP.

Bank of Canada singles out household debt as ‘biggest domestic risk’

By Erica Alini - Thursday, March 8, 2012 at 11:02 AM - 0 Comments

The Bank of Canada thinks interest rates are fine where they are, at least for now. It announced today that it will hold the key rate at one per cent, where it’s been since September 2010, and didn’t discuss possible hikes. Those accustomed to the central bank’s penchant for dulling the news got the message: ”the Bank is a bit less dovish,” reads a CIBC note, which predicts that “markets will pick up on the slightly improved change in tone on the economy, and might move forward the implied date for the first rate hike.”

The bank, in fact, said it believes the Europeans will manage their public debt mess without bringing down the system, and that the Canadian economic outlook has ”marginally improved,” in part because the U.S.  is doing a little better.

But another big reason to believe Mark Carney may be closer to a rate hike than previously thought, is the bank’s statement about Canadian wallets:

Canadian household spending is expected to remain high relative to GDP as households add to their debt burden, which remains the biggest domestic risk. 

As Tamsin McMahon wrote a couple of weeks ago in Maclean’s, Canadians owe an average of $1.53 for every dollar they earn–just below where American debt stood when housemageddon hit south of the border. And there’s little question that record-low interest rate have encouraged Canadian borrowing, much as they did in the U.S. under Alan Greenspan, who is widely blamed for bringing America from the dot-com bust to the housing crisis. Up here, though, it’s hard to point the finger against Carney, whose hands are tied by a lucklustre global economy, the Fed’s decision to keep U.S. rates low through 2014, and rising commodity prices, which are already pushing up the loonie and hurting exports and the manufacturing sector.

Still, the bank sounded an upbeat note—and that may indicate that the rate hike the housing sector very much needs may be closer than we dared hope for.

Time to panic about the housing market

By Tamsin McMahon - Tuesday, February 28, 2012 at 10:50 AM - 0 Comments

Photo Illustration by CJ Burton

Back in the heady days of 2005, America looked like an awfully nice place to buy a house. Home prices were marching ever upwards. Home ownership was at record levels. Mortgage rates were at historic lows. Unemployment was falling while the economy was growing at a healthy clip.

Home sales had started showing their first signs of slowing that year, but that didn’t sway the National Association of Realtors from its persistently sunny view of the country’s housing market. “We’re confident that housing is landing softly,” David Lereah, the association’s chief economist, wrote in a November 2005 report just before house prices started a descent that would eventually wipe out nearly $30 trillion in global wealth.

Looking back, the signs of a country burying its head in the sand about a housing bubble seem obvious: the well-told tales of tricky teaser rates, of mortgage fraud and of gigantic home loans handed out to buyers with no income or assets. Household finances were even sketchier. In 2005, the average American owed $1.30 in debt for every dollar of income. Home equity was eroding as Americans pulled more than $900 billion out of their homes to buy cars, granite countertops and put their kids through college.

Continue…

What happens when Canada’s housing bubble pops?

By Erica Alini - Thursday, January 26, 2012 at 1:56 PM - 0 Comments

A few days ago, Bank of Canada governor Mark Carney released another alarming, albeit muted, warning shot about the state of the Canadian real estate market. Some properties in Canada are “probably overvalued,” the central banker said during an interview with CTV. Last week Finance Minister Jim Flaherty hinted he is also worried about housing: “We watch the housing market carefully and we are prepared to intervene if necessary,” he said.

So, are we literally living in a bubble? And when it bursts, will it get as ugly as it did south of the border? Here’s where the most recent speculation is pointing: Continue…

Canada’s household debt keeps climbing

By macleans.ca - Tuesday, December 13, 2011 at 1:42 PM - 0 Comments

Canadian consumers kept piling on debt for a third consecutive quarter between July and September, according to Statistics Canada figures, the Globe and Mail reports. The ratio of debt to personal disposable income, the key measure of household debt sustainability, was 152.98 per cent in the third quarter, up from 150.57 per cent in the previous three months. The report comes as Bank of Canada governor Mark Carney warned that Canadian families’ credit burden, which has surpassed levels seen in the U.S. and U.K,. represents the biggest domestic threat to the economy.

The Globe and Mail