Juggling Dynamite

A decade of ultra-low interest rates and lax lending enabled Canadians to borrow and spend their way into a state of extreme financial fragility.  Today Canadian households are world leaders in terms of average household debt that is 180% of average disposable income (second only to Australians at 200%), and a household saving rate that is near an all-time worst at just 1.1% of income.

At the same time, Canadians are struggling with some of the least affordable home prices in the world (inflated by years of easy lending and debt addition).  The more and longer one pays for shelter and related costs, the less one saves for other goals like retirement and children’s education.  Meanwhile, Canadian household consumption has been driving some 60% of the nation’s economy (GDP).  Bottom line:  Canada has never been less prepared for an economic slow down/income loss/rise in unemployment, and yet it is underway nonetheless.

This has daunting implications for households, lenders, real estate prices, business reveunes, tax receipts, deficits and financial stability overall.  It also suggests great investment opportunities will present as this downcycle plays out, but only for those who anticipate and position for it in advance.

The number of Canadians who are $200 or less away from financial insolvency every month has climbed to 48 per cent, up from 46 per cent in the previous quarter, in a sign of deteriorating financial stability for many people in the country, according to a new poll…

“Canadians appear to be maxed out with no real plan for paying back what they have borrowed,” said MNP President Grant Bazian in a release. “This raises many alarming questions about how and if consumer debt will be repaid, particularly if conditions deteriorate or interest rates rise.”  Here is a direct video link

This take from a Vancouver real estate agent is basic and yet little understood by many.  This credit-cycle-induced downturn is now underway folks.  Although, it is certainly not ‘unprecedented’.  It is common for people to misunderstand or miss the historical patterns and behaviour of financial cycles.

The Alternative lending space is booming and it has CIBC’s Bejamin Tal worried. According to the bank alternative lending now makes up 15% of the market in the GTA. Its likely similar here in Vancouver as I am seeing a lot of it. This space makes the financial system inherently more unstable in my opinion as these are all equity based loans on one terms. If equity drops as we are seeing now, it sets off a chain reaction. Here is a direct video link.

This clip offers a good update on issues affecting the Australian property market, households and the economy overall.  There are many parallels to Canada as well.

When it comes to housing bubbles, the bigger the bubble, the bigger the pop. That’s what Australia is probably experiencing at the moment — A large deflation that isn’t showing any signs of slowing down. It was once thought that it was just a healthy, but overdue, correction. But now regulators, policy makers, and the Reserve Bank of Australia, are all beginning to worry. Although the current slide hasn’t shown too much of a threat to the broader economy, even the most conservative of observers are suggesting that prices will continue to fall at least until the end of 2019. The biggest problem is that the main causes of the downfall cannot be altered easily. The only tool left in the RBA’s arsenal is another rate cut, but many commentators have argued that such a cut will only ease the pain — not cure the affliction.  Here is a direct video link.