“Canadians are even more in debt than anyone imagined. Revised Statistics Canada calculations place household credit market debt in the second quarter at 163% of disposable income, well above the previously reported 152%.”

“Canadian households are even more in debt than anyone imagined, according to a revised Statistics Canada calculation that gives a more accurate picture of family finances.
The revisions place household credit market debt in the second quarter at 163 per cent of disposable income, well above the previously reported 152 per cent, although the two levels are no longer a direct comparison.
The new numbers remove non-profit institutions from the household category, giving a more accurate accounting of family finances. The revision shows debt growth over the last decade that looks “eerily similar to the U.S. experience, just before their dramatic housing bust,” said David Madani, an analyst with Capital Economics.
“Overall, this supports our bearish view that Canada’s housing boom is unsustainable and the eventual correction, which we think is already underway, is likely to have a material negative implications for growth,” he said.
The revisions show a much steeper climb, with debt growing in each of the past six quarters.”

– from ‘Canadian debt even higher, stats show’, Julian Beltrame, Canadian Press, 16 Oct 2012

No surprise. All part of the same big theme.
– vreaa

39 responses to ““Canadians are even more in debt than anyone imagined. Revised Statistics Canada calculations place household credit market debt in the second quarter at 163% of disposable income, well above the previously reported 152%.”

  1. This number blows me away so much, that I’m not sure I understand.

    Does this imply that Canadian families spend a $1.63 for every after tax $1 they bring in?

    If so, how is this possible? Would having 3 rental condos contribute to this calculation? Meaning you would be a million in debt, with $3000 of monthly mortgage payments, but those payments be offset with rental income. Does that still count towards this 163%? How is this all calculated?
    Also is this an average, does it mean some households are actually higher?

    Explanations welcome!
    Please and thank you.

    • “Does this imply that Canadian families spend a $1.63 for every after tax $1 they bring in? ”

      I believe it means that they hold total debt equal to 163% of their disposable income. The cost of servicing that debt on a monthly basis would be less.

    • Also, I’m not sure, but I think this number excludes mortgage debt on your primary residence. But all other consumer debt and HELOC’s would be included, which makes the number even scarier.

      Correct me if I’m wrong.

      • Ben Rabidoux

        Hi Nuxfan

        This data includes mortgage and consumer debt. It’s the whole enchilada. Note that this revision was implemented by Stats Canada to align more closely with UN and IMF reporting practices. The US has yet to adjust theirs, but I suspect it will result in little change there, as I discussed in this post:

        http://theeconomicanalyst.com/content/canadian-housing-sales-fall-15-stats-canada-revises-debt-income-ratio-significantly-higher

      • thanks for the clarification Ben.

        Reading more about it, it seems my initial definition is off as well – it is a measure of amount of income used to service debt.

      • From the statcan web-site:

        “Growth in household credit market debt continued in the second quarter, increasing 1.8% from the previous quarter, mainly attributable to increases in consumer credit and mortgages. The household credit market debt to disposable income ratio was 163.4%, up from 161.8% in the previous quarter.”
        and further:
        “Note to readers:

        Household credit market debt comprises consumer credit, mortgage, and loan debt of households — which include unincorporated businesses.”

        But actually households are going in line with the government here:
        “Government net debt trends upwards
        Total government net debt (expressed at book value) rose to $897 billion, an increase of $20 billion from the first quarter. Expressed as a percentage of GDP, the ratio was 50.1%, up from 49.4% in the previous quarter.”

    • homelessindunbar

      We have friends in the 163% category. They draw down their LOC each month to make ends meet. So I guess it is 163% and counting….

      • Cranston Snord

        Gah, had family members like that. They sold their place in Port Coquitlam last year and moved to Calgary. They’re at least debt free for now. Talk about being able to get out at market peak.

    • It means Canadians owe a average of $1.63 for every $1.00 they earn (after tax). If that seems “not so bad”, and it’s very low for young families that buy a house, remember that we have the baby boomers now approaching retirement. This massive group of people with peak income should be building assets and paying off debt. How could that ratio be at a peak? Shouldn’t it be going down?

      • Sadly, methinks that the boomers are just exasperating the problem by financing (or leasing) luxury cars and “upsizing” to the mansion they always dreamed of at the wrong time, just to keep up with the neighbours. I have a friend, late boomer, who is tired of his 2 year old BMW and wants to get a newer one in the “M series” that runs around $120,000. The kicker is that he makes around $30,000/year and has a $300,000 mortgage.

        Since I am not carrying any debt and know quite a few people in the same situation, he surely makes up for a couple of people. Then again, with the current low interest payments, he is just renting everything from the bank.

        It’s going to blow up.

        Just a matter of time.

  2. Again this evil propaganda against hoemoaners? Do you want to cause a crash of our healthy market?

  3. So much for HAM

    Looks like Hot Asian Money (HAM) isn’t as much of a factor as Caucasians On Credit (COC).

  4. As I’ve said before, stats like this mean that when this all completely implodes even those of us who were prudent will feel the hit. Admittedly, for most of us in that camp, the hit won’t be as hard as for most of the profligate spenders.

    However, I can guarantee that many folks of little means who did not participate in this nonsense will also be hurt badly.

    I find the entire thing so frustrating. In the end, I’m going to be happy to see things collapse on their own weight… something that seems to be starting now. But we have to remember that it won’t happen without many of the more powerless among us also paying the price for something that they had no part in.

    • Royce McCutcheon

      The housing run up contributed to chasing off a couple close friends and researcher/physician colleagues.

      The recent leveling off hurt the bottom line for some family and other friends (though these same people are hopefully beginning to see how lucky they were to be clear of this market in mid-2012 as opposed to trying to unload later).

      Through all of this, my immediate family has done well. We have rented great spaces for a fraction of what they would cost to own, saved/invested conservatively for our future based on two professional incomes, and built on our local roots (we are both 3rd generation locals and we’ve started the 4th generation). I feel pretty confident we’ve done our best to minimize our exposure to this nutbar time of debt excess.

      And yet… we work in a field dependent upon public largesse, so we are very exposed to bubble fallout. Families getting shellacked financially won’t give to human health research. Governments worried about re-election are less likely to make funding for research into heart disease, diabetes, cancer, etc. a priority when the voting public they first bought by handing out lots of debt rope are now struggling against the nooses they’ve fashioned for themselves and begging for air. I feel fairly certain that in the coming years federal and provincial parties of all stripes are going to compete with each other to show their love for bubbled-addled families, doing whatever they can to buy their votes. (Yes, I’m cynical.) Sure, private sector support for our work also exists – but it has been down since 2008/09 and it will not be roaring back to cover gaps.

      The knock-on effects of this housing bubble have real implications well beyond housing. I see VREAA’s assertion about the housing bubble has led to “misallocated resources” with wider consequence illustrated in my personal circumstances – and in many other areas, of course. I am not worried about my family’s future. But, even though we’ve committed 100% to trying to make a life here, I do worry about my family’s future in Vancouver. Same goes for other people I know working in my field and in others.

      • …”real implications well beyond housing”…

        I’m going to nominate that one for 2012 Understatement ‘O TheYear, RM…

        From a political [vs. life] science perspective the implications are even more ‘sketchy’ as economics becomes the new ‘politics’.

      • ‘Political economy’ has been with us during the entire Industrial and Information Revolution ramp. I could reduce this further, but ‘Reductio ad absurdum’ threshold is very low for me here.

        Nem, i know you like my astro-stuff. Have a look at the Canadian natal chart sometime. July 1, 1867. Factor the orbit of Saturn, and Canada’s age…. do you arrive at exactly 5 orbits? What is the significance of this, grasshopper?

      • Cranston Snord

        Well said. Why do I care about housing prices in Vancouver and the bubble market even though I’m a happy renter and likely to move elsewhere soon? Because the housing bubble affects everything else. It alters the cost of living and changes the social dynamics of the city. It alters political priorities (usually for the worse) and stratifies and dismantles society. In short: the housing bubble affects everything and you can’t escape it even if you don’t have a penny invested directly in Vancouver real estate or its first order industries.

    • Here is a cynical way to look at the situation.

      Those with a lot of debt will simply walk away from their debts with out much consequences. They will still have health care, they will still be able to send their kids to public schools, they will still be able to use public transit … etc. They will probably still have a job and can afford the basics of life. And they will be happy to be relived from having to pay back their debt, while they enjoyed decades of the good life.

      People who choose to live debt free lifestyle like myself don’t see the world from the way that people in a lot of debt see the world. For the highly indebted maybe the reasoning is something like this.

      “its so much debt that i can never pay off let me just try to max out the debt because I know that I will have to declare bankruptcy at some some point so might as well make the bankruptcy figure as high as possible, why go bankrupt over 10K when you can go bankrupt over 1 million.”

      • Ralph Cramdown

        There will be some calculating people like that, to be sure. But there will be a lot more who’ll sacrifice all sorts of stuff in an attempt to make their payments, including draining their RRSPs in a futile attempt to save the house.

      • “Those with a lot of debt will simply walk away from their debts with out much consequences”

        I doubt this will be prevalent. After all in the US it was only deadbeat subprimers who “walked away” and Canadians are more prudent and higher quality because prudent and higher quality banks made absolutely sure before lending them money.

      • Former & future renter

        “Canadians are more prudent and higher quality because prudent and higher quality banks made absolutely sure before lending them money.”

        After these prudent and higher quality Canadians have lost their jobs and exhausted all of their savings, RRSPs, etc. and the decision is between next month’s mortgage payment or keeping the lights on, which do you think they will choose?

        There is no moral hazard in not paying the mortgage, it just means losing the house, not the quality of your character.

  5. more not better? … well, when it’s time to misallocate capital, i want some of that liquor that talks … ps. v, an emission captured in comment_purgatory – and upon reread, perhaps rightly so this time – ciao

  6. I keep looking for definitions of disposable income, and am a bit confused – american and british calculators seem a bit different than I think what’s intended here.

    Is disposable income just (income – taxes)? Or is it also (income – source deductions)? (Like union or professional deductions, MSP, etc.)? Anyone know?

    My husband and I would cap our willingness to get a mortgage at 3x annual before-tax income (for one of us). We’re cheap-skates, doubtless. But that suggests to me that if we DID ever buy real estate, for some percentage of our mortgage-holding lifespans we might have 300-400% debt to disposable income.

    So I wonder if what this really says – more important than credit card or LOC profligacy – is that there are way too many dollars at the beginning of the mortgage debt cycle – too few houses-paid-off, too many mortgages-outstanding.

    • Disposable income is after-tax income less food, shelter, utilities, daycare/tuition, etc. It’s basically whatever amount is available that you can choose to spend at your discretion or not on a month to month basis.

  7. Anyone with a finance degree can see that this can go on forever…

  8. “The new numbers remove non-profit institutions from the household category”

    Huh. No doubt the Bank of Canada picked up on that detail long ago. One hopes.

  9. I think it is worth noting that the 163% number would be an AVERAGE debt per AVERAGE household. However, there are tons of retired households out there who have effectively no debt. And there also are a fair number of households of young, renting, single people, or people who live in very small towns…where the balance sheets are really very small, and there is comparatively little debt, too. What that brings you back to is just how indebted the typical age 30-55 homeowning couple is. Probably that number is more like 300%. And that is the only household type that can actually service debt…and it is tapped out. So where is economic growth going to come from? Demographics are negative. Credit growth is set to turn negative. This is going to end badly.

      • Indubitably. In that spirit… An elucidatingIinterGenerational MusicalParable… from Coupland’s Vanguard….

        [NoteToEd: Yes, objectively speaking – after adjusting for the OntologicalIllusions ‘O Yourh and applying the requisite Hedonic™ and SeasonalTrends™ ‘smoothing factors – YVR was SO much more fun then…]

    • Indeed. The screws have been turned against further credit growth as we would anticipate at the end of a period of credit excess. Both the public and private sectors are now limiting what latitude remained to propel further forward momentum in that sphere with banks requiring greater levels of capital, collateral or proof of income and government simultaneously tightening regulatory requirements. As this coincides with a consumer who is effectively tapped-out having already brought forward as much demand as their incomes could muster in a low rate environment we now seem perched on the edge of a significant economic slowdown. The coming decline will indeed be consumer led. The roots of these problems are found in the unprecedented growth of household debt with mortgage obligations forming the greatest part of the burden. The evidence is unequivocal and damning. The current declines in both sales and prices of homes though are mere harbingers of much deeper troubles that now lie ahead. The real pain will set in as declines in consumption lead to rising unemployment while bringing on the negative feedback loop that ultimately heralds recession, declining government revenues and business contraction. These outcomes are anticipated of course and the historical record of the genesis of recessions provides ample proof to illuminate any doubters. What is important for people to understand though is that these outcomes are both inevitable and inescapable under conditions as they now exist. Perhaps all that awaits is a stock market shock that is now widely anticipated. John Hussman has recently noted that his indicators show that “estimates of prospective return/risk in stocks are in the most negative 0.5% of historical instances” in a market that is overvalued, overbought and overbullish. A significant market correction seems almost inevitable and although this is not the consensus view, warnings from guys like John should give participants cause to be concerned about capital preservation over the coming months. It is against this backdrop and our current knowledge of the developing global economic slowdown that Canadians find themselves in a position of relatively poor liquidity and high indebtedness. Household cashflow is insufficient to address any major shocks at this time. There is little room therefore for flexible actions on the part of the consumer to further bouy the economy as both the values of their major assets and their investments simultaneously come under threat. The usual response in such situations is certainly not a spending spree. On the contrary we should expect the usual reaction in difficult times where individuals work harder to liquidate debts (delever), increase their savings or in some cases bankrupt. None of these is positive for a consumption society and so a resulting slowdown in business activity is the outcome as dollars are withdrawn from the spending economy and confidence falls. I believe many who were shortsighted in this regard will greet the coming slowdown and deflation of their asset values with dismay and profound regret as they discover belately just how fleeting equity gains can be in a falling market. What is also inevitable is that our national ledger will be impaired as an outcome as national revenues fall and the demands for fiscal intervention increase. We should remain wary too of bragging about our current public debt/GDP numbers as these are destined to turn more negative over the coming years while the impending deveraging cycle works through to its conclusion.

      • We’d agree; well said.
        And we also follow Hussman, BTW, a very sensible analyst.

      • + policies arrayed-aligned to alleviate outright defaults, through bailouts and printing as req’d … why own a home when you can own a bunch of homeowners … debt extinguished are debtors freed … can’t have that

      • Thanks Vreaa.

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