Juggling Dynamite

A confidential government report obtained by CBC News reveals federal workers have been booking off sick in record numbers, costing Canadian taxpayers more than $1 billion a year in lost wages alone.

The internal Treasury Board report indicates federal public servants are staying home an average of 18 working days a year, or almost a full month off the job.

That is about 2½ times the average rate of absenteeism in Canadian private industry, and almost twice the level of sick leave and disability claims in the rest of the public sector.

See clip and story here at Public Sector Sick Days cost $1 billion a year.

I think the numbers speak for themselves. People can argue this about work place “stress in the public sector” all they want, but this is nonsense. There is work place stress in every kind of work. No private employee has a job guarantee of any kind. And government employees are paid significantly more than their private sector equivalents in general and especially since over the past 4 years as private sector jobs have vanished, the public sector has continued to receive increased benefits as if they are somehow immune or above the reality of today’s tenuous global economy. I think that the public sector is in for a painful readjustment to reality period over the next few years as budget constraints demand smaller governments and less entitlements for public workers.

This level of absenteeism could simply not be tolerated in the private sector. Most small business do not have dozens of people to fill in for missing workers. Smaller teams are more accountable to each other, because if one member is missing it creates a tangible burden on co-workers left to pick up the slack. At the end of the day, in general, public servants take more sick days because they are allowed to. It is tolerated by the culture and mindset of working for a big, faceless institution. I see this lack of personal accountability as similar to the outrageous entitlements of many working in the c-suite of publicly traded corporations. They take too much, because they can. It is tolerated and bank-rolled by a body of public shareholders who are largely unknown and not present to witness day to day operations and behaviors.

In typical after-the fact-fashion the Canadian government today announced necessary but way late changes to the terms available on mortgages backstopped by Canadian tax payers via the Canada Mortgage and Housing Corp (CMHC).

Buyers with less than 20% as a down payment have until now been able to receive underwriting insurance via the CMHC for up to 95% of property values stretched over an amortization of up to 30 years. Today Conservative Finance Minister Flaherty announced that effective July 9, new home buyers will ‘only’ be able to stretch the repayment schedule over a 25 year amortization. And on refinancing, ‘only’ be able to borrow 80% against their home equity.  The impact of this change is significant. Shortening the amortization on a conventional mortgage from 30 to 25 years, means an increase in monthly payments of 12.5%. At today’s average Canadian house price of $375,000 this change works as follows:

$375,000 home – 20% required down payment of $75,000= $300,000 to finance
$300,000 mortgage at 25 year amortization vs 30 year amortization = +12.5% higher payments per month.

And that is assuming that today’s generational lows in interest rates continue indefinitely. When (not if) mortgage rates do start to normalize back to historic averages, the impact will be enormous. When mortgage rates move from the 3% range today to just a 5% range in the future, this will dictate a further 23% increase in monthly carrying costs and that does not include the burden of similar interest cost increases on all the other credit that Canadian families are carrying today.

Few seem to comprehend that Canadian households are now (heading into the next global downturn) encumbered with the highest consumer debt levels in history at more than 154% debt to disposable income. This is higher than the Americans were carrying at the peak of their credit bubble in 2006. Six years later US housing has fallen more than 30% and is likely to fall another 20% before prices fulfill their destiny of reverting to historical averages. Canada has not yet started into the downside correction of our now 15 year housing run up. And we are starting into this one with a total debt to GDP ratio that leads the most indebted nations in the world, north of 425%.

These mortgage changes were needed for a reversion to some semblance of sanity in government policy in this area. But they will dampen housing demand without question. Canadians will need to save or find more up front before they can buy and will be able to pay less in order to carry less mortgage monthly. This all presents large downside risk to Canadian real estate markets, to an aging population over-invested in housing, to our over-exposed banks and of course for we the taxpayers and our government’s naive promises to balance the Federal budget by 2015.

The ironic part is that the Canadian government said it is making these changes now in order to “avert a household debt crisis.” Sadly that horse left the barn a few years back, aided in large part by this same government that in 2006 made it their first order of business to extend CMHC coverage to 40 year amortization, interest only and 95% financed mortgages! 6 years later, this government is just trying to undue the mistakes it implemented at the outset. Unfortunately their back-peddling now does not do anything to remove the high risk mortgages that have become the 600 billion dollar responsibility of Canadian taxpayers via the CMHC underwriting.

The important lesson here is to understand that Canada has earned its present credit bubble and we will suffer the fall out just as every other over-indebted country and family is doing elsewhere today. If history is a guide we will all now receive a concentrated education in the downside of debt which will change our attitudes and behaviour for the next 20-30 years.

Meredith Whitney, founder and chief executive officer of Meredith Whitney Advisory Group, talks about the outlook for financials, the U.S. economy and JPMorgan Chase & Co.’s trading loss. She also explains why post-credit bust, the add-leverage-and-stir-to-look-genius model is no more and banks will need to get back to offering traditional banking (lower profit) services. The credit genie is going back in the bottle for another 20 years or so. Here is a direct link.