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rebeccahpedersen · 5 years

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Everybody Wants To Talk About DEBT!

TorontoRealtyBlog

Was last week March Break?

I barely noticed.

Sure, the real estate market was slow, and that always happens this time of year. But if you had told me that it was actually “Debt Week,” I might have believed you.

When I sat down on Friday afternoon to read all the articles I had bookmarked during the week, I noticed a common theme. Aside from SNC Lavalin, which is actually boring the pants off me right now, I noticed that there were a solid five or six articles about debt.

Consumer debt, mortgage debt, worldwide debt, and the debt that finances real estate construction – all appeared in front-page stories in the major newspapers.

There are so many directions in which we could take today’s conversation, especially with the Federal budget being announced this week, so let me feed you a few links from last week (all of which you should read!) and provide my comments as well as the takeaways.

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From the Huffington Post on Friday, March 15th:

“Total Debt Worldwide Hits $240 Trillion And The Bank Of Canada Is Worried”

A number like $240 Trillion is eye-catching, and yet I think this headline would have been lost on most casual readers.

Sure, the number is big. But it’s so big that it almost seems out-of-touch with the average reader, who is more concerned with the $25 charge on their Rogers bill that they don’t understand. I really fail to believe that 90% of the population could care at all whether worldwide debt is $240 Trillion or $240 Million. Many don’t understand the difference, but even those that do likely just aren’t interested.

I mean, how does that number affect you?

You being anybody from the 21-year-old who just finished school and is trying to decide whether to get a job at ABC Corp riding a desk all day, or try your hand at becoming an “Influencer” on social media, to a 46-year-old, middle-class parent of two, to a 72-year-old retiree bouncing back and forth between Florida and the GTA every few months.

Pardon my cynicism this early on a Monday morning, but while the regular TRB reader both understands and cares about that headline, most people do not. And perhaps that is part of the reason why worldwide debt is at an all-time high?

Very few people out there could actually sit down and hold an intellectual conversation about where the world could or will be in two, five, or ten years if this continues, and/or if the same countries continue borrowing, and the same countries continue lending.

Does the guy living in the proverbial trailer-park in Alabama really understand the $22 Trillion national debt? If you told him that countries like China & Japan partially own the mighty United States, don’t you think he would just stereotypically kick back another Budweiser and yell ‘Merica?

Does the 20-year-old at Ryerson University have any interest in fiscal and monetary policy? Do they even teach that in school anymore? I know, I know – tell me once again that I’m out of touch, but I’ll gladly take that as a compliment if we’re somehow rewarding and applauding the 27-year-old downtown condo-dweller for taking 42 photos of his salad to get the “right one” for Instagram, rather than reading…………………a book.

Yeah, that made me sound old alright.

But my point is that part of the reason that worldwide debt is so high is because of two things that we will never change:

1) People don’t understand. 2) People don’t care.

On a worldwide basis, people don’t care. Why does worldwide debt interest the average Canadian? It doesn’t.

On an individual basis, many people still don’t care. Should the 27-year-old condo dweller spend $1,200 on his VISA for bottle service at a nightclub on Saturday night? The answer doesn’t matter, because he’s going to. He’ll simply “deal with it.”

That’s my rant.

Now for the most notable portion of the Huffington Post article:

Canada’s high household debt, which is now more than 178 per cent of disposable income, is the central bank’s top domestic financial vulnerability, she said.

“The good news for Canadian businesses and households is that the financial system — globally and here at home — is safer than it was a decade ago thanks to much stronger safeguards,” she said.

Wilkins added it’s important for policy-makers around the world to continue efforts to conduct stress tests on different parts of the financial system, and, when necessary, put in safeguards.

Say what you want about Canadian real estate, the CMHC, interest rates, borrowing, and the like, but let’s not ever lose sight of the fact that our banking system is one of the safest in the world, and that’s partially due to all of the changes implemented after we watched the sub-prime mortgage crisis play out in the United States in 2008…

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From the CBC.ca on Thursday, March 14th:

“Statistics Canada Says Household Debt Grew Faster Than Income In Fourth Quarter”

Let me sound like an old man again and say, “I remember.”

I remember when the ratio of household debt to income topped 120%.

I remember when it topped 130%.

By the time it topped 140%, it was clear that things weren’t going to change.

It topped 150% back around 2008.

I barely noticed when it topped 160%.

Hovering in the 160’s, I started to round up and say “About 170%.”

And last week, a report came out that noted household debt in Canada rose from 178.3% in the 3rd quarter of 2018 to 178.5% in the 4th quarter. I mean, that’s basically 179%, which is basically 180%.

So there we are! A new threshold!

From the article:

On a seasonally adjusted basis, Statistics Canada said households borrowed $21.2 billion in the fourth quarter as mortgage loan demand rose $2.3 billion to $12.3 billion.

However, despite the increase in the fourth quarter, on an annual basis, household credit market borrowing fell 19.5 per cent to $84.6 billion in 2018, the lowest level of borrowing since 2014.

Credit market debt, which includes consumer credit and mortgage and non-mortgage loans, totalled nearly $2.21 trillion in the fourth quarter.

Mortgage debt reached nearly $1.44 trillion, while consumer credit and non-mortgage loans combined to total $769.4 billion.

The bears should have a field day with this one…

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From the Financial Post on Thursday, March 14th:

“Consumer Debt Stabilizing, But Canadian Banks Face ‘Significant’ Risk If Economy Goes South, Moody’s Warns”

Here’s a different media outlet’s interpretation of the debt-to-income ratios announced last week, with this Financial Post article concluding that the debt to income ratio had “levelled off.”

Of course, they also noted that the amount borrowed and the way it’s borrowed is concerning.

Interesting from this article was a note about auto loans; something I had yet to hear about until now:

There are also signs that some consumers, facing higher mortgage costs, are agreeing to “longer term manufacturer-subsidized auto loans” with lower payments.

“As vehicles depreciate each year, longer-term loans result in higher rates of ‘negative equity’ where the value of the vehicle is less than the amount of loan principal,” the report says.

This article mentioned that the share of the “Big Six” banks had fallen, with one particular bank’s share increasing at a notable rate:

The Canadian arm of HSBC Holdings Plc, have managed to grow their share of the mortgage market to 6.4 per cent in 2018 from 5.4 per cent in 2016.

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From the Globe & Mail on Thursday, March 14th:

“Many Canadians Say They’ll Have To Tap RRSP’s, Take Second Mortgages, Sell Assets As Debt Burden Rises”

I spent $120 on chicken on Saturday for no apparent reason.

I went to Loblaws to pick up strawberries, milk, and eggs, as per my wife’s request, but I noticed that chicken was on an insane sale; something like $7/KG. That’s basically $10 for a pack with five massive chicken breasts, which, if you’re picking up on the way home from work one day at any grocery store is likely going to be priced around $22.

So I picked up $120 worth, took it home, put six chicken breasts in each Ziploc bag, and placed them in my freezer like it were a file cabinet for meat. My wife makes me dinner on Monday night with enough for Tuesday, and on Wednesday night with enough for Thursday, every week, and chicken is a staple of that diet. This cost savings was a no brainer, as was the eight minutes it took for me to shuffle the meat into my freezer.

I have had both friends and family call me “cheap” before, but I think it’s the very definition of frugality.

As 2019 rolls on, I wonder more and more if financial accountability, ie. one’s personal responsibility for his or her own financial situation, has completely fallen off in the last half-decade. Too many parents are buying their children $300 hockey sticks when the kids would do just fine with $30 versions. Too many cleaning ladies feel as though they need the new iPhone.

Sorry if that sounds rude, but I’ve always felt that truth and common sense should trump sensitivity and potential to be offended, although I don’t know if that plays well in today’s society.

I sell real estate for a living, so call me biased when I think that buying a home for you or your family is more important, and a better investment, than consumables. Expensive dinners, brand-name clothing, and sporting/music events – most of which people can’t afford.

Every time I check Instagram I see that so-and-so is out at the Leafs game, or down in Punta Cana, or out at some la-de-da restaurant that will be the envy of everybody in the know.

OF COURSE Canadians are taking second mortgages, selling assets, and tapping into RRSP’s. Nobody saves anymore! Nobody thinks about money or the future, or has a financial plan.

Sidebar here, but Rob Carrick wrote a brilliant article last week called, “It’s Time To Stop Pretending RRSP’s Are A Universal Retirement Savings”

You won’t believe this, or, perhaps you will…

Statistics Canada numbers show RRSP contributions grew by 2.6 per cent annually to $40.4-billion between 2005 and 2016, the most recent year for which there is data. This isn’t a mind-blowing number, but it’s much ahead of the average 1.7-per-cent inflation rate for that period.

The census of who’s actually contributing this money is where you see the real story in RRSP contribution patterns:people aged 25 to 34 fell to 11 per cent of contributors in 2016 from 14 per cent in 2005;

35- to 44-year-olds fell to 19 per cent from 26 per cent; 45- to 54-year-olds fell to 28 per cent from 32 per cent; 55- to 64-year-olds surged to 31 per cent from 23 per cent; people 65 or older jumped to 9 per cent from 4 per cent.

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From Better Dwelling on Monday, March 11th:

“Canadian Real Estate Developer Debt Hits An All Time High”

Have you ever wondered how these condominium projects are built?

I’m sure the naive and/or uninterested folks out there simply assume that some “billionaire” buys a plot of land and constructs a condo, all while eating caviar on a yacht. But most of the readers know that the banks finance these projects, and much of the time, the builders don’t have a whole lot of skin in the game.

Of course, it’s also possible that developments could be financed by syndicated mortgages, but we found out last December that Fortress Developments was a sham all along.

This article from Better Dwelling puts accurate numbers to the speculative nature of real estate financing in Canada. This is really great stuff:

Canadian real estate developers are pushing their debt capacity to new highs. Bank of Canada (BoC) numbers show developers racked up a new record high at for credit at chartered banks in Q4 2018. Debt levels for developers are almost three-quarters higher than previous peaks.

Canadian real estate developers have borrowed a new all-time record. The balance of loans at chartered banks reached $16.68 billion in Q4 2018, up 2.36% from the quarter prior. This represents a massive 20.28% climb when compared to the same month last year. The previous record was a quarter before, which topped the Q4 2016 high.

Later in the article, we’re told in massive bold text: “Canadian developers borrowed over 70% more to fund this boom”

To appreciate how much money developers borrowed from banks, you need to look at past peaks. The 2008 peak was only 1.11% larger than the peak reached in the previous building boom in 1992. It wasn’t until 2013 when the current trend breached that level for good. In the most recent quarter of Q4 2018, we’re 72.3% higher than 2013 levels. It’s a lot of leverage for the peak cycle this time around.

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Well, that’s a lot of reading for a Monday, if you take my advice and bookmark those links.

It’s also a lot of cynicism, but I can’t help it.

You regular TRB readers are far smarter than the average bear (in the Yogi sense, not financial market sense), and maybe you’re nicer, quieter, and humbler than me, but I really do think that most of society out there today has a “YOLO” mentality, and they’re busy living today with very little regard for tomorrow.

Financial literacy was a huge topic on this blog in 2018, and it will continue to be as we move forward.

So much of the debt out there today is unnecessary.

But does that even matter in the context of conversations about debt-to-income, interest rates, the real estate market, et al?

Have we actually surpassed the time to discuss financial accountability? Is that how far we’ve come?

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