The Vanier Institute today released its 11th annual report on The current state of Canadian family finances: 2009 report. Some excellent charts depict key trends in the financial status of Canadian families. Its not a pretty picture. Some of the highlights:
-Average household debt climbed to a record $96,000 per family in 2009
-Debt to family income levels rose to 145% (!), the highest ever reached since the study began and predicted to climb to 160% by 2012 if trends persist
-mortgage payments more than 90 days in arrears jumped 50% over 2008
-credit card payments in arrears three months jumped 40%
-59% of family finances were in such a fragile situation that a delay of just one week in a pay cheque would cause serious difficulties
-70% of women with young children were now working outside the home, pointing to the need for two incomes to make ends meet.
-The booming housing market was singled out as a particular area of concern, with record-low interest rates encouraging families to take on more debt than they can afford to buy a property.
-Over the past 20 years, Canadian housing prices have averaged 3.7 times household earnings. At the end of 2009, prices are closer to 5 times household earnings with real estate making up a record 48% of the net worth of Canadian households
The following quote captures some of the study's key conclusions:
[Canadian] House prices had corrected for a few months in late 2008 and early 2009 but took off again. Among several factors, the pickup reflects record low interest rates and the little reported fact that the Canadian government, via CHMC (Canada Mortgage and Housing Corporation), is now purchasing and/ or insuring most new or renewed mortgages from banks. The statistics reveal that, over the last year, outstanding mortgages held by banks have basically been flat while NHA (National Housing Act) securitized holdings (held by CMHC) are up by one-third and thus represent almost all of the growth in residential mortgages outstanding in the last year. As such, the risk of falling house prices is increasingly held by the taxpayer.
What might happen if the average house price was only 3.7 times (the two decade average) the average household income after income taxes? The house price would be about $250,000 or back down to 2005 levels. This $250,000 price is 26% below the October-November price of $340,000. A quick return to the “traditional” house-price to income ratio would be very difficult for people who recently purchased at high prices.
Actually even a long, gradual trend down in prices will be painful for the masses who have levered into bubbling prices over the past year. Today Finance Minister Flaherty announced a couple of small steps to begin reining in Canadian leverage and real estate speculation. Too little, too late to stop the bubble at this point; but at least it is a start toward unwinding the bad policy choices our government has made over the past 5 years.