The Vancouver Sun:
The headlines this week were on the verge of hysteria: Household debt surpasses levels foreshadowing U.S. housing bust. Canadian household debt hits new high. Canadian household debt much higher than believed. Revision raises alarm bells. Household debt hits record. And so on.
The reason for all the fuss was a report from Statistics Canada that said the ratio of credit market household debt to disposable income reached 163.4 per cent in the second quarter, up from 161.8 per cent in the previous quarter.
If those numbers look unfamiliar, it's because the debt to income ratio figures have been amended as part of Statistics Canada's historical revision of the national balance sheet accounts. Last month, the pre-revision debt to income level was 152 per cent. So Canadian households are not significantly more financially vulnerable today than they were in September; the change is largely due to accounting protocols.
That's not to say the level isn't high, it is. But there are mitigating factors that frustrate any attempt to compare Canada with the United States and the United Kingdom, where a ratio of 160 per cent precipitated a housing crash and financial crisis.
For example, the same revision that raised the level of household debt, also increased household net worth to $6.6 trillion from $6.3 trillion in 2011 from 2010. On a per-capita basis, household net worth rose to $190,800 from $182,900 year over year. In the second quarter alone, household net worth increased by 0.9 per cent.
While household debt to income is a popular measure, it graphs what would normally be an income statement entry against a balance sheet item. Why do we chart a single year's income against total debt? Governments don't do that. Canadian government gross debt to revenue would be approximately 288 per cent. Instead, governments worldwide tend to use the lesser market debt to gross domestic product, giving Canada a more palatable 33 per cent.
At the household level, debt to total assets (a consumer version of GDP) in the second quarter was 19.56 per cent. That's up about 0.5 per cent from the same quarter in 2011. Hard to get a gripping headline out of those numbers.
Even if we allow that Canada's household debt level approximates that of the U.S. before the collapse, financial vulnerability is where Canadians and Americans part ways. Because mortgage interest is tax deductible in the U.S., it makes sense (or appeared to before 2008) to carry a large mortgage. There is no tax benefit for Canadians, who prioritize paying off the mortgage. The result is that owner's equity as a percentage of real estate is just under 70 per cent in Canada and little more than half that in the U.S.
Another salient point is that the subprime mortgage market, which many blame for the U.S. housing debacle, accounts for less than three per cent of outstanding mortgages in Canada, compared with roughly 14 per cent in the U.S. before the fall.
A high level of debt increases the risk of default but Canadians aren't there yet. The percentage of loans for which payments are 90 days or more past due stands at a measly 0.4 per cent.
Canada's aging population is likely to have a moderating influence on household debt levels because older households have lower debt than younger ones. A Statistics Canada study found that individuals under the age of 45 represented less than half of the population but 54 per cent of borrowers and held 61 per cent of all household debt. Canadians over the age of 65 have an average of $66,000 in debt compared with $129,200 for those under 45.
Tighter mortgage rules finally seem to be slowing home sales and many analysts predict Canada's frothy housing market will have a soft landing. Homeowners with mortgages may be disappointed that last year's real estate agent's appraisal is old news but that hardly constitutes a national crisis.
Policy-makers have to tread carefully here, as Bank of Canada governor Mark Carney and Finance Minister Jim Flaherty have done, so as not to overreact to headlines that may not tell the whole story.
The headlines this week were on the verge of hysteria: Household debt surpasses levels foreshadowing U.S. housing bust. Canadian household debt hits new high. Canadian household debt much higher than believed. Revision raises alarm bells. Household debt hits record. And so on.
The reason for all the fuss was a report from Statistics Canada that said the ratio of credit market household debt to disposable income reached 163.4 per cent in the second quarter, up from 161.8 per cent in the previous quarter.
If those numbers look unfamiliar, it's because the debt to income ratio figures have been amended as part of Statistics Canada's historical revision of the national balance sheet accounts. Last month, the pre-revision debt to income level was 152 per cent. So Canadian households are not significantly more financially vulnerable today than they were in September; the change is largely due to accounting protocols.
That's not to say the level isn't high, it is. But there are mitigating factors that frustrate any attempt to compare Canada with the United States and the United Kingdom, where a ratio of 160 per cent precipitated a housing crash and financial crisis.
For example, the same revision that raised the level of household debt, also increased household net worth to $6.6 trillion from $6.3 trillion in 2011 from 2010. On a per-capita basis, household net worth rose to $190,800 from $182,900 year over year. In the second quarter alone, household net worth increased by 0.9 per cent.
While household debt to income is a popular measure, it graphs what would normally be an income statement entry against a balance sheet item. Why do we chart a single year's income against total debt? Governments don't do that. Canadian government gross debt to revenue would be approximately 288 per cent. Instead, governments worldwide tend to use the lesser market debt to gross domestic product, giving Canada a more palatable 33 per cent.
At the household level, debt to total assets (a consumer version of GDP) in the second quarter was 19.56 per cent. That's up about 0.5 per cent from the same quarter in 2011. Hard to get a gripping headline out of those numbers.
Even if we allow that Canada's household debt level approximates that of the U.S. before the collapse, financial vulnerability is where Canadians and Americans part ways. Because mortgage interest is tax deductible in the U.S., it makes sense (or appeared to before 2008) to carry a large mortgage. There is no tax benefit for Canadians, who prioritize paying off the mortgage. The result is that owner's equity as a percentage of real estate is just under 70 per cent in Canada and little more than half that in the U.S.
Another salient point is that the subprime mortgage market, which many blame for the U.S. housing debacle, accounts for less than three per cent of outstanding mortgages in Canada, compared with roughly 14 per cent in the U.S. before the fall.
A high level of debt increases the risk of default but Canadians aren't there yet. The percentage of loans for which payments are 90 days or more past due stands at a measly 0.4 per cent.
Canada's aging population is likely to have a moderating influence on household debt levels because older households have lower debt than younger ones. A Statistics Canada study found that individuals under the age of 45 represented less than half of the population but 54 per cent of borrowers and held 61 per cent of all household debt. Canadians over the age of 65 have an average of $66,000 in debt compared with $129,200 for those under 45.
Tighter mortgage rules finally seem to be slowing home sales and many analysts predict Canada's frothy housing market will have a soft landing. Homeowners with mortgages may be disappointed that last year's real estate agent's appraisal is old news but that hardly constitutes a national crisis.
Policy-makers have to tread carefully here, as Bank of Canada governor Mark Carney and Finance Minister Jim Flaherty have done, so as not to overreact to headlines that may not tell the whole story.
© Copyright (c) The Vancouver Sun
No comments:
Post a Comment