Saturday, October 20, 2012

Canada Household Debt Approaches US Bubble Levels; Inane Housing Comments From Canadian Economist

Shortly after the peak in the US housing bubble, Americans? household debt-to-income ratio reached 170 per cent.

For comparison purposes, Canadian household debt-to-income is now at 163 per cent, according to Statistics Canada.
Canadians? debt-to-income ratio has soared to 163 per cent, much higher than previously believed, according to revised Statistics Canada figures.

The household debt level has increased 1.8 per cent in the second quarter, bringing it to a similar level seen in the United States before the housing bust and the 2008 financial crisis.

Statistics Canada said the new figures are the result of a revised method used to measure household net worth, which is more in line with international accounting standards. Non-profit institutions have been removed from the household category to get a better representation of family finances.

While the latest figures are troubling, RBC Chief Economist Craig Wright says they shouldn?t necessarily trigger alarm bells.

The Canadian household debt ?doesn?t strictly compare with the U.S.,? he told CTV?s Power Play Monday.

About 70 per cent of household credit is mortgage-related, Wright said, but new data suggests housing markets across Canada, except in Vancouver, are cooling off.

The Canadian Real Estate Association said Monday that sales of existing homes fell 15.1 per cent in September from a year ago, although last month's numbers were slightly higher than in August.

?So as we move forward we hope (the debt) ratio will stabilize,? Wright said.
Inane Housing Comments From Wright

Those comments from Wright are quite amazing. The more leverage one has in housing, the more susceptible personal finances and the economy will be to a sustained downturn in that area.

What really takes the cake however, is Wright's "hope (the debt) ratio will stabilize" in spite of falling home prices.

Good grief.

In a recession (and one is on the way if not started), layoffs will increase and income will drop. Housing prices and the stock market will both take a hit as well. Thus, debt-to-income ratios will rise and net worth will plunge. Canadians should expect a double whammy.

Mike "Mish" Shedlock

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