The debt trap
There’s an interesting article in yesterdays New York Times about American debt, complete with interactive features and debt calculators to compare your debt load to others: Given a shovel, Americans Dig Deeper into Debt.
Years of spending more than they earn have left a record number of Americans like Ms. McLeod standing at the financial precipice. They have amassed a mountain of debt that grows ever bigger because of high interest rates and fees.
While the circumstances surrounding these downfalls vary, one element is identical: the lucrative lending practices of America’s merchants of debt have led millions of Americans — young and old, native and immigrant, affluent and poor — to the brink. More and more, Americans can identify with miners of old: in debt to the company store with little chance of paying up.
It is not just individuals but the entire economy that is now suffering. Practices that produced record profits for many banks have shaken the nation’s financial system to its foundation. As a growing number of Americans default, banks are recording hundreds of billions in losses, devastating their shareholders.
There’s a meme in the local media that Canadians are more financially conservative than Americans, and while that may certainly be true I wonder about Vancouverites specifically – With our negative savings rate, relatively low incomes and high housing costs are the residents of this city really that different from some of the more extreme US cases?
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mrjauk Says:
July 22nd, 2008 at 8:28 am
That may be a meme (that we Canucks are more financially conservative than our Yankee brethren south of the border) but it’s not true.
In fact, the last time I looked, Canadian household debt was a larger percentage of total income than in the US.
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Londonernow Says:
July 22nd, 2008 at 8:43 am
Yeah, Canadians are more fiscally conservative, socially responsible, environmentally friendly, compassionate, etc, etc, etc, than Americans.
Dream on!
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betamax Says:
July 22nd, 2008 at 8:50 am
Canadians were more conservative decades ago but are no longer. Myths die hard and the media shills will continue to bleat about our fiscal responsibility and implicit moral superiority; meanwhile, Canadians are spending like a drunken sailor with a stolen credit card.
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Anonymous Says:
July 22nd, 2008 at 8:57 am
hey you negative nagger fools.
be a bit more positive. sky has not fallen here.
No gloom and doom for B.C. economy, yet
Finance Minister Colin Hansen looked The Vancouver Sun’s editorial board in the eye late last week and maintained that, despite all the economic gloom and doom that’s going around these days, the B.C. economy is doing pretty well.
http://www.canada.com/vancouve.....936c36c93e
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Vansanity Says:
July 22nd, 2008 at 9:00 am
US Home Prices post record drop:
http://www.nj.com/business/ind....._drop.html
Down approximately 5% accross the board year over year and .3% from April to May. If we are lagging the US by two years, buckle up. 2010 should be a year we never forget, and not because of that ice thingy that’s going on. Speaking of which:
http://vancouver.24hrs.ca/News.....1-sun.html
John, I know, I know it’s different here.
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Mr. Simpleton Says:
July 22nd, 2008 at 9:01 am
I work for an engineering company of about 70 people.
I have a family of five and no personal debt. I am the only one here in this position.
Some thirty-somethings at the office with engineering salaries, no children and no mortgages are 20-30k in debt…
When it’s time to buy new tires for the winter people are devastated and activate yet another credit card to cover for it.
And I’m not even talking about those who “own” their homes.
These guys bring no lunches to work and wear old clothes that could use more frequent washing, drive beat-up broken cars and stuff themselves at every company BBQ…
Do you think I exaggerate? Think again.
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Macronomics Says:
July 22nd, 2008 at 9:49 am
How the hell does one accumulate so much debt with no mortgage?
They must be spending hundreds on booze every weekend.
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arbitrage Says:
July 22nd, 2008 at 9:54 am
um… i usually equate dressing poorly, driving an older model car, and stuffing yourself at a company bbq, as being cheap/thrifty/wise with money (but not with image – which is important or not depending on personal preference). Sounds more like a path to savings than debt.
Mr. Simpleton, are the ones with debts the same ones stuffing themselves and driving old cars?
Maybe the engineers make a shit salary. haha.
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patriotz Says:
July 22nd, 2008 at 9:54 am
That may be a meme (that we Canucks are more financially conservative than our Yankee brethren south of the border) but it’s not true.
Yes it is true. Canada’s savings rate in 1Q2008 was 2.8%, nothing to get excited about but better than the US.
http://www40.statcan.ca/l01/cst01/indi02a.htm
Per capita, Americans have more debt than Canadians:
http://www.statcan.ca/english/.....act-11.htm
And don’t forget that government’s fiscal performance in Canada is way better than the US.
Don’t extrapolate BC’s situation to the rest of Canada. Consumer spending as a % of GDP is about 10% higher in BC than Canada as a whole, but about the same as the US. That’s incredibly high for what used to be a resource-based exporting economy. BC also has an astounding -8% savings rate. Compare that with +6% 10 years ago, with higher taxes. The fact is that BC has become even more of a debt-driven consumer economy than the US. It’s just a bubble waiting to collapse.
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James Says:
July 22nd, 2008 at 10:01 am
The truly astounding thing is the level of debt that the average construction joe has. Most of these guys spend like there’s no tomorrow. These are the guys who barely made it through high school and have partied through most of their lives. They’re driving brand new 50,000 trucks, have boats and other toys and have basically squandered this construction boom on nothingness.
The good news is I want a nice crew cab truck for doing home maintenance and towing an RV on the weekends with the family and when the bust happens there’s going to be some good deals. I’d like a boat as well. I’ve got the cash just waiting (well not enough for the boat and the RV just yet but the truck for sure).
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kabloona Says:
July 22nd, 2008 at 10:05 am
I’m already seeing the boats and trucks with “for sale” signs, so you shouldn’t have long to wait…
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blueskies Says:
July 22nd, 2008 at 10:09 am
someone in the previous thread suggested an SUV as an investment…. umm don’t think so
next thing someone is going to suggest building something to live in and being able to sell it for more than they paid for it…. too funny!
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Scratchy Says:
July 22nd, 2008 at 10:22 am
“I’m already seeing the boats and trucks with “for sale” signs, so you shouldn’t have long to wait… ”
They’re still asking for what they think they “deserve”. The time to buy will be when they’re saying, “Please, for the love of God just give me some money, any money.”
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Mr. Simpleton Says:
July 22nd, 2008 at 10:33 am
Of course the engineers make shit salary. Just like most of the people around here. If you have a regular job, pay your taxes and obey the law you will have a hard time making ends meet without getting into MAJOR debt. I thought this was obvious to everyone…
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VancouverGuy Says:
July 22nd, 2008 at 10:48 am
Our negative savings rate is shocking.
My only problem with the article linked is that it blames lenders for the over-spending of consumers. Consumers are responsible for their over-spending. Lenders are responsible for making bad loans, but they are responsible to their shareholders for that, not to consumers. Consumers have to be responsible for their own purchasing practices. Lenders are only responsible to shareholders.
Now, to the extent that we have a serious problem with people over-spending and not understanding the concept of earning power vs debt, perhaps there should be something done. People should have the right to over-spend and ruin their lives if they want. Lenders should also have the right to make poor lending decisions if they want, although I think we will see this cut back significantly; it’s called a credit bubble because at some point it pops and people’s lending habits change. So with my laissez-faire view of things, what can the government really do to prevent this from occurring, given that when it occurs negative externalities are generated. The only other thing I can think of is mandatory financial education, specifically into how debt works, how real estate works, and how budgeting works.
I’m not sure that would necessarily help in the end. I can’t really think of a better solution though that does not involve government intervening in people’s lives and overseeing their personal financial decisions.
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pricedoutfornow Says:
July 22nd, 2008 at 10:48 am
Debt, debt, debt….they say since the introduction of rampant credit in our society, people no longer have to visit the food bank to make ends meet. Just rack up the old credit card to feed your children! Plus go on a few vacations, go buy that SUV you’ve always wanted and tada! You’re living the typical middle class lifestyle! Too bad it’s all about to come crashing down.
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Anonymous Says:
July 22nd, 2008 at 10:53 am
Interesting distribution in that data. I put in our situation – zero debt (not “almost” zero – really zero, none, nada, zilch) – and discovered that we aren’t so rare. According that data a full 1 in 4 people have no debt whatsoever.
That’s pretty impressive. And scarily bipolar.
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Bubble Lad Says:
July 22nd, 2008 at 10:56 am
I agree with 16/Anon – purely anecdotal, but it seems like most people I know are in either one camp or the other: zero debt, or up to their eyeballs.
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Lager not Logger Says:
July 22nd, 2008 at 10:56 am
You can mandate education, but you can’t mandate intelligence.
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Lager not Logger Says:
July 22nd, 2008 at 10:59 am
They’re still asking for what they think they “deserve”. The time to buy will be when they’re saying, “Please, for the love of God just give me some money, any money.”
You don’t have to bother waiting for that here when you can just go down south and find plenty of people begging for anything for their truck or boat. The exchange rate is good and importing US vehicles into Canada is not that tricky. The extra cost often ends up being just a few hundred dollars, which is pretty good considering you can save several thousand dollars off comparable local deals.
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Lager not Logger Says:
July 22nd, 2008 at 11:00 am
You can also search craigslist for keywords like ‘desperate’, ‘must sell’ and ‘leaving country’ to find good local vulturing oppourtunites.
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Mr. Simpleton Says:
July 22nd, 2008 at 11:02 am
I used the full interactive calculator and after adjusting the age and income it only shows 5% of families similiar to mine who had no debt at all. That’s one in 20, not in four… Sounds more realistic to me.
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patriotz Says:
July 22nd, 2008 at 11:39 am
If you have a regular job, pay your taxes and obey the law you will have a hard time making ends meet without getting into MAJOR debt.
So how come we had a positive savings rate back in the 90’s with higher taxes, as I said above?
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jesse Says:
July 22nd, 2008 at 11:59 am
“I can’t really think of a better solution though that does not involve government intervening in people’s lives and overseeing their personal financial decisions.”
You can always try Islam.
“If you have a regular job, pay your taxes and obey the law you will have a hard time making ends meet without getting into MAJOR debt.”
BS. Many people have no debt and go on to live normal happy lives, unless “happy” means owning property in an affluent neighbornood on an engineer’s sh!t salary. Debt is often taken out with the expectation of an increase in future earnings to repay it but doesn’t always work out that way for everyone.
I have a hard time understanding what a -8% savings rate really looks like on a balance sheet.
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VancouverGuy Says:
July 22nd, 2008 at 12:19 pm
I also think that it should not be difficult to make ends meet given current salaries. When should it be tough? When you spend too much on crap. Honestly, I spend little enough that I could easily get by on an engineer’s salary and have a lot of excess income, and I think that I’m actually fairly wasteful. I definitley spend more than most people require on clothing because of my requirements for work, and I eat out more often than I need to.
Why do people have a cashflow problem then at that level of income? They drive expensive cars, whereas I walk to work. They live in expensive places or own in an overpriced market, whereas I’m happy to rent something reasonable. They go on lavish trips and go out to expensive events, whereas I’m happy just playing squash and hanging out with friends. We were having this discussion in the office just now, and what others were saying is that there is a mentality of entitlement. Some people believe they DESERVE everything in life, and believe that they can just take on additional debt to get it if they don’t have the cash right now.
I’m not sure where that mentality comes from. I’m open to suggestions.
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jesse Says:
July 22nd, 2008 at 12:26 pm
“Some people believe they DESERVE everything in life, and believe that they can just take on additional debt to get it if they don’t have the cash right now.”
There is nothing wrong with borrowing to spend today and paying later if there is a perceived benefit and the borrower realises the debt must be repaid. Borrowing money is not free but sometimes cash today is better than cash tomorrow, which is why mortgages are so common.
People may not “deserve” a fancy existence but maybe they think they do because they are smart and will eventually earn lots of money. Who am I to say?
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jesse Says:
July 22nd, 2008 at 12:35 pm
“I’m not sure where that mentality comes from. I’m open to suggestions.”
Many see their parents in debt and think that’s just how things work, others live for the day and know the consequences, and I’m sure peer pressure leads many to borrow too much. I agree with you the government needs a hand because they invariably pick up the pieces of people with too much debt. Laissez faire is fine as long as you’re willing to also be laissez faire with the personal tragedies that invariably result.
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M- Says:
July 22nd, 2008 at 12:38 pm
For what it’s worth, I’m an engineer, under 30. My wife (who earns half my income) and I are able to save $50K per year from our salaries, plus investment income from our savings. It goes without saying that we have zero debt.
Admittedly, our rent is cheap (free), and we live frugally, but that $50K/year can pay for a heck of a lot of “things”. I’ve never understood how people with good incomes are able to blow all their money.
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realbiz Says:
July 22nd, 2008 at 1:01 pm
Free rent, huh? I don’t suppose it’s the norm here…
If you mean you are rent-free because of a paid off home, than all the power to you.
If you mean you are rent-free as a favor received from others/family, well then we can’t compare apples to oranges, can we?
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VanTOVan Says:
July 22nd, 2008 at 1:02 pm
OT
I wonder if this PR will solidify our standing as the best place on earth?
http://news.bbc.co.uk/2/hi/americas/7519178.stm
…Misha Glenny visits British Columbia in Canada where homegrown marijuana has become big business.
Mebbe this can be spun to help out the tourist industry…
Olympics? Ross Rebagliati?
Proposed license plate motto “It’s always 4:20 here”
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Drachen Says:
July 22nd, 2008 at 1:04 pm
Speaking of debt. US doubles national debt in a matter of days.
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bcubbins Says:
July 22nd, 2008 at 1:10 pm
People look around and see others spending lavishly, driving new cars, eating out at expensive restaurants, sending their kids to ballet lessons and hockey camps. And they think that if (seemingly) everyone else can afford it, then they can too. But they don’t see the vehicle leases, credit card debts, payday loans or lines of credit, not to mention the stress and arguments, and the bankruptcies. If all of that was out in the open, people likely wouldn’t feel quite so compelled to keep up with the Joneses.
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umdesch4 Says:
July 22nd, 2008 at 1:11 pm
Isn’t it obvious. The first wave of children coming out of school where educators must be “sensitive to a child’s self-esteem issues” above all other concerns has created a generation of coddled little consumer-drones. They’ve been told they’re extra-special, ultra-smart, and cannot fail. So they all expect their careers to be on the fast track to super wealth…why not borrow as much as you want now? When you become CEO, paying off those debts will be dirt simple!
In the meantime, they can all GET OFF MY LAWN!
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Drachen Says:
July 22nd, 2008 at 1:33 pm
M
I presume along with being rent free you are probably utility free and child free too. If that’s the case then you don’t really understand anything about normal married people.
Did your parents buy your car too? What else do they provide for you? I bet you eat for free pretty regularly too.
What’s left to spend money on?
What’s really surprising about your comment is that you seem to think you should be able to understand normal people.
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jesse Says:
July 22nd, 2008 at 1:48 pm
Single parents can make ends meet; It’s a tough life but you can buy used, rent cheap accommodations, and be selective about what foods you buy. If anyone is “entitled” to more it would be people like this but they get very little and still survive, many without taking on debt. It’s not fair to criticize someone for not “understanding” what it takes to survive on little income. We can all do the math. I agree with many here that taking out debt is not absolutely necessary, even for low income earners. Don’t expect to eat out every night though.
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Anonymous Says:
July 22nd, 2008 at 1:50 pm
millions of Americans — young and old, native and immigrant, affluent and poor
Just to point out that if your debts are greater than your assets you are poor.
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Anonymous Says:
July 22nd, 2008 at 1:59 pm
I have a hard time understanding what a -8% savings rate really looks like on a balance sheet.
A simple sample
Income 1000
RRSP 200 (not savings)
Mortgage 250 (paying off your mortgage doesn’t count as savings either)
Credit Card Payment 50 (Also doesn’t count nor should it)
Food 300
Rent 280
= 1080 Spent and 1000 dollars taken in =-8%
The thing to remember is that savings rate doesn’t mean what people think it means. Only money put into a savings account qualifies. Since most banks pay you almost 0% interest only idiots have a high savings rate. The rest of us invest, pay off mortgages, ect.
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Aleks Says:
July 22nd, 2008 at 1:59 pm
I don’t understand parents who let their kids live at home when they’re out of school and earning decent money. I’ve known a couple and they were able to save up large down payments to go straight from living at home to buying a condo. Which is great for them, but seems like an awful lot of coddling by the parents.
If you’re living at home and “saving” $50,000 a year, probably half of that is actually money your parents are giving you as subsidies. And in fact, if you aren’t paying for room and board you really have no expenses at all, so what ends are you making meet, exactly? When I lived at home I was able to stay out of debt only earning a couple hundred bucks a month from a paper route. Obviously if single moms can’t get by it’s their own fault.
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BMP Says:
July 22nd, 2008 at 2:13 pm
The average American FICO score is 680. The average Canadian FICO score is 750. Does this mean we’re more responsible with debt, and more apt to live within our means?
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Drachen Says:
July 22nd, 2008 at 2:29 pm
Anonymous
Wrong wrong wrong.
“Income 1000″
Fine
“”RRSP 200 (not savings)”
Wrong, it is savings.
“Mortgage 250 (paying off your mortgage doesn’t count as savings either)”
Wrong again, paying down a mortgage IS savings. Only the interest payment is not.
Credit Card Payment 50 (Also doesn’t count nor should it)”
Wrong again, except for interest payments.
“Food 300
Rent 280″
“= 1080 Spent and 1000 dollars taken in =-8%”
Hard to say what the interest payments would be in this example but it’s certain that the savings in your example would be positive.
Here is a simple definition for you. “income that is not consumed by immediately buying goods and services is saved.” (wikipedia)
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M- Says:
July 22nd, 2008 at 2:29 pm
Drachen/Aleks: to those interested in my financial situation, after getting out of school I rented for a while with friends, then got married and bought a townhouse in a good neighbourhood. Mortage? Not a problem, we were able to save more than the payments every month ($20K/yr savings, and my salary was considerably lower then, too).
The market got bubbly, so we sold.
A parent was in poor health in a nearly-empty SFH, so we moved in as caretakers, and his health has improved considerably. We pay our fair share of utilities, taxes, and food. The rent for a comparable SFH is less than our mortgage payments used to be, so there’s no big subsidy going on there. It’s not like we’re living in a luxury condo or anything.
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Drachen Says:
July 22nd, 2008 at 2:31 pm
Oh and investments also count as savings. Buying a house that is assessed at $500,000 with a $500,000 mortgage is neutral for savings.
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betamax Says:
July 22nd, 2008 at 2:32 pm
“I’m not sure where that mentality comes from. I’m open to suggestions.”
Various sources, but at the heart of it all is marteting.
I’m no conspiracy nut, but it’s a fact that there are people hard at work in marketing firms and universities who are utilizing all the market and psychological research they can get in order to better part fools from their money.
Aside from pushing particular products (traditional advertising), marketers realized years ago that they could boost sales in general by convincing people that their good feelings derived from buying things are actually far more valuable than the money paid to buy them. “You’re worth it” is their rallying cry.
The cultural changes we see re. consumption are various, with differing immediate causes, but none of them happened by accident.
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betamax Says:
July 22nd, 2008 at 2:37 pm
They’ve been told they’re extra-special, ultra-smart, and cannot fail. So they all expect their careers to be on the fast track to super wealth…why not borrow as much as you want now? When you become CEO, paying off those debts will be dirt simple!
True. Another reason people in North America spend like drunken sailors is because they’ve been coddled by experiencing primarily a boom market for 60 years.
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ellery Says:
July 22nd, 2008 at 2:37 pm
Elizabeth Warren did a study on bankruptcies in America. Her findings were that people do not spend more on fun/unnecessary stuff than they did in they did 30 years ago. People spend more on electronic gadgets now, but they used to spend more on dry cleaning and consumer durables. People spend less, inflation-adjusted on clothing now than the did in 60s, partly because clothing is so much cheaper to make.
People are mainly in debt now due to high mortgages & student loans. My parents didn’t graduate with $40,000 on debt and they had options for a decent job out of high school. Spending power has been decreasing for a long time, and families need 2 incomes when they used to need one.
Keep the scolding for flippers and leave the single moms alone. Tanta at Calculated Risk does a better job of this than I will anyway:
http://calculatedrisk.blogspot.....cleod.html
As for keeping the government out of this…well, those pesky usury laws did a nice job of protecting people from themselves until they were repealed in the 80s (in the States, leading the way for the rest of the world). Some government intervention is necessary in a civilized society l. For example, I am in favour of fire departments, even though they also protect stupid people who smoke in bed. You don’t want any laws restricting usury? Then I don’t see why you’re complaining about an asset bubble in the first place.
PS – I am debt free, a renter, not living at home and not a single mom.
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jesse Says:
July 22nd, 2008 at 3:07 pm
Anon36: I can’t find a good definition of personal savings rate but found this article on statscan and some definitions here. I don’t see any indication RRSPs are included in PCE. Here is a discussion on BC’s savings rate. BC should have a lower savings rate because there are more retirees per capita and possibly a propensity for other indirect sources of income (read: offshore money or black market).
The -8% savings rate stat is the average. I find it hard to believe that roughly 15% of the population that is retired can bring down PSR that far. I also am suspicious at how many British Columbians truly have that many assets offshore that are transferred into the province for spending (why not buy stuff at a fraction of the price in Asia?). All indications are that the vast majority of people living in BC also work in BC and are not of the jetsetting ilk. We keep getting impressions that BC is filled with retirees, rich immigrants, and gangsters where I think while there is some impact on PSR it seems far-fetched to think there’s enough of these types to move the dial to -8% on average.
The most logical conclusion is the -8% is an indicator of a high level of wealth that is being tapped to supplement spending habits, the most likely source being real estate.
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Anonymous Says:
July 22nd, 2008 at 3:14 pm
Oh and investments also count as savings.
No they don’t. Understand I think that investments are savings and should be included but that doesn’t change how the government calculates the “savings rate”.
http://findarticles.com/p/arti....._n15716591
The important quote:
“savings rate is incomplete because it excludes the value of investments in the stock market or capital gains”
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ellery Says:
July 22nd, 2008 at 3:18 pm
“savings rate is incomplete because it excludes the value of investments in the stock market or capital gains”
weird. maybe that explains the savings rate a little, because a lot of the eager savers I know have been advised to put all their savings into mutual funds. aggressive mutual funds, since the younger you are the more risk you can take on – according to most mutual funds salespeople.
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VancouverGuy Says:
July 22nd, 2008 at 3:22 pm
I posted what an 8% negative savings rate looks like over time on my blog.
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jesse Says:
July 22nd, 2008 at 3:29 pm
You still can’t get away from the change in savings rate in BC compared to other provinces in the past decade. It’s not like BCers are masters at investing in equity markets compared to other provinces. Something else, maybe…
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Anonymous Says:
July 22nd, 2008 at 3:32 pm
Basically the point I was trying to make is that the savings rate really doesn’t mean anything. It is possible to be born poor have a -8% savings rate your entire life and retire wealthy. You just can’t tell how someone is doing by looking at such a deeply flawed metric. The difficulty faced by the stats people is they have to calculate metrics in the same way over time for them to have any comparative value but people’s behavior may change quite a bit over such a long period of time. I’m sure when the savings rate formula was created only the wealthy bought stocks so including them wasn’t worth doing but now you are missing a big part of people’s savings.
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jesse Says:
July 22nd, 2008 at 3:38 pm
Nobody’s disagreeing that savings rate does not give the whole picture but BC is unique to Canada in terms of a very negative value. Why this is the case compared to other parts of the country is up for debate.
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Anonymous Says:
July 22nd, 2008 at 3:46 pm
Jesse not a bad point but I stand by my argument that the metric is so flawed as to be meaningless. If someone had a graph of net worth and net worth minus housing I’d be much easier to convince.
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jesse Says:
July 22nd, 2008 at 4:05 pm
The metric is not flawed but the interpretation of the metric is. It measures what it measures, and what it measures is that people in BC, more than other parts of the country, are relying on sources of money beyond standard measures to supplement their spending. What could these sources be — investments, black market money, debt (collateralised with property or not), or what?
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Drachen Says:
July 22nd, 2008 at 4:05 pm
Anonymous (get a handle by the way)
“The important quote:
“savings rate is incomplete because it excludes the value of investments in the stock market or capital gains””
You’re misreading it. What they’re saying is that unrealized gains are not included. If you buy a stock for $500 you have saved $500. If that stock’s value increases to $1,000 the government does not count that as a savings of $500. The latter is what they’re referring to.
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Drachen Says:
July 22nd, 2008 at 4:22 pm
Ok I did some more checking.
“If your savings rate is negative, it doesn’t necessarily mean that you don’t have any savings. It means you’re spending more than you earn, so you’re dipping into your savings or you’re borrowing to pay for purchases.” – Bankrate.com
“The Personal Saving Rate (PSR) is the fraction of personal income that is not consumed.” – NYU, Stern.
“Ratio of personal saving to disposable personal income. Disposable personal income is personal income less personal tax and nontax payments. Personal saving is disposable personal income less personal outlays.” – Answers.com
“Individual saving may be measured by estimating disposable income and subtracting current consumption expenditures.”
- Thefreedictionary.com
Do you understand now?
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jesse Says:
July 22nd, 2008 at 4:30 pm
Drachen, the statcan description is here
Personal income
Sum of income from labour, unincorporated business, interest and investments, and government transfers received by individuals and non-profit or fraternal organizations.
Personal disposable income
Personal income less income taxes and other mandatory deductions paid to government.
Personal consumption expenditure
Sum of expenditure on food and beverages, clothing, housing, furniture, medical care, transportation, communications, and recreation.
Personal saving
Personal income less consumption expenditure, taxes, and transfers to government, corporations and non-residents.
Personal savings rate
Personal savings as a percentage of personal disposable income.
Interesting that remittances result in a lower savings rate. Income from investments is part of personal income.
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jason Says:
July 22nd, 2008 at 4:34 pm
another typical one sided ill informed canadian jealous of americans tirade written as objective reporting.
well, here is a little objective reporting from a former native vancouverite now living in the united states.
yes, there have been bank failures recently here. yes, there are a lot of foreclosures here (record number) here. yes, banks, even large banks are reporting losses. etc etc etc.
ready for the TRUTH?
yes, a couple of smaller banks here have failed. poor business practices. larger mortgage firms have been hurt. yes, these firms lend money to the lower income bracket (next point will clarify it). foreclosures up. true, because people who shouldnt have qualified to buy a home were lent money with zero down and stupid low adjustable mortgage rate. if the people 9who shouldnt have been qualified to own a home) default, they walk away. no down payment loss to them…so they dont care about a foreclosure. it’s the banks problem (which it should be for loaning out the money). yep, fannie mae etc=poor business practice. record bank losses? somewhat true. citibank reported a loss of 4 billion or so…what the report fails to mention that in 2006 (didnt look up 2007) it made $25 billion or so in profit. in fact, it was the MOST profitable company in the world that year…beating out exxon and even stupid walmart (who has a profit margin of 3.5%).
so, the skinny of it is that the foreclosures are occuring in areas where there shouldnt have been homes in the first place and the people defaulting on their loans shouldnt have been owning a home in the first place.
has this hurt the american economy? somewhat. but not as bad as the news makes it out to be. nowhere near what the news makes it out to be. esp envious jealous canadian news. every time i call my sister, the first thing she asks is ‘oh my god, i hear the maerican economy is devastating. you must be suffering.’ etc etc etc. well, i tell her the truth. i say. no, in fact, the homes in my area have not decreased in value whatsoever. i do not know of anyone who lost their job…except those in the mortgage business (understandably) and no, i have been blessed with a continued stream of business.
the one thing i notice when i visit family and friends in canada is that canadians seem to obsess more over the happenings of our country than most americans do. why is that? why? because it is called distraction and scape goating. i HIGHLY doubt that the canadian standard of living will ever be as high as the american standard of living. even with the canadian dollr being slightly worth more than the us dollar…if you know economics, this is not a good thing. this discourages america to buy canadian goods. who else is going to buy canadian goods? canadians? all 30 (or so million of them). or would a canadian producer rather sell to the california market where there is 50 million people? dont be so proud of the current weak american economy. it will greatly…and i mean GREATLY impact the prosperity of the canadian economy. so alberta better crank up that sand oil production because there isnt a whole lot else that the united states would want. psst, we have lumber, minerals and fisheries just as much as canada…only the hippies (for now) say it isnt good to rip it open just yet. yes, you have your oil sands…but i am pretty sure we still have more offshore oil, oil shale, coal and nuclear warheads!
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patriotz Says:
July 22nd, 2008 at 4:50 pm
It is possible to be born poor have a -8% savings rate your entire life and retire wealthy.
I can start with nothing, spend more than I earn my entire life and retire wealthy? Now just how can I pull that off?
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rx Says:
July 22nd, 2008 at 4:51 pm
Last I checked the New York Times was a US paper, not Canadian, so I’m not sure what you’re complaining about. Of course the media blows situations up to make them seem worse than they are – you can bet they’ll do it here when more people go into foreclosure.
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Anonymous Says:
July 22nd, 2008 at 4:52 pm
I can start with nothing, spend more than I earn my entire life and retire wealthy? Now just how can I pull that off?
Invest in Vancouver Real Estate!!
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ellery Says:
July 22nd, 2008 at 5:00 pm
Jason, I tried to read your post, but I was so envious, I couldn’t finish. I’m not ready for the truth.
Actually, I rarely hear people talk about America anymore, except on the bubble blogs. There’s not much left to say about the US these days, it’s so twentieth-century. Paris and Berlin, on the other hand…I am green then.
As for the personal savings – it is interesting if that metric is flawed because it’s out of date, isn’t it? Saving cash, slowly, is not in fashion anymore (you don’t want to miss out on the market!) and it’s not profitable with taxes and low interest rates. I guess this is what the war on savings means…
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ellery Says:
July 22nd, 2008 at 5:09 pm
Oh, Jason/US, I think maybe this is why you’re in trouble. You stopped making things, and switched to a FIRE economoy:
http://www.onpointradio.org/sh.....a_main.asp
Low dollar helps your exports, but threatens your infrastructure. There is a caller 3/4 way through the show who does a great job challenging the economists on the show who suggests the American economy is not in trouble. The caller *claims* to be an (American) trader, but you will probably tell from his Mountie accent that he is Canadian completely overcome with jealousy.
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patriotz Says:
July 22nd, 2008 at 5:10 pm
“Personal consumption expenditure
Sum of expenditure on food and beverages, clothing, housing, furniture, medical care, transportation, communications, and recreation.”
Note that “housing” in the above refers to shelter, i.e. the consumption of housing. Buying a house is an investment, not consumption. But remember borrowing money is a negative investment. So if I borrow 500K and buy a house with it, that in itself is neither savings nor consumption.
But if I buy a house and the ownership costs are higher than renting, that results in a decrease in my savings rate going forward, because carrying costs (interest, taxes, etc) are consumption. Interest is consumption because it’s the cost of renting money. If you pay more to rent the money to buy a house (and other carrying costs) than to rent the same house, you have increased your consumption for no real benefit. You have made a gift to the seller of the house by paying more than it’s worth.
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ellery Says:
July 22nd, 2008 at 5:13 pm
59patriotz Says:
July 22nd, 2008 at 4:50 pm
It is possible to be born poor have a -8% savings rate your entire life and retire wealthy.
I can start with nothing, spend more than I earn my entire life and retire wealthy? Now just how can I pull that off?
Try playing the lottery. Maybe you haven’t heard but gambling is the new black.
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Anonymous Says:
July 22nd, 2008 at 5:16 pm
“a couple of smaller banks have failed”
Did you miss that IndyMac went under? It’s one of the top 3 bank failures of all time. Not quite sure which definition of “small bank” that fits.
“$4B in Cititbank writeoffs”
Ok, seriously, where the hell have you been hiding? Citibank writeoffs over just the past 6 months are well over $20B – and it ain’t over yet.
“canadian jealous of american tirade”
Ok, clearly you’re just trolling, as the article is from the New York Times. Last I checked, NYC had not been annexed into the Canadian Dominion…..
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ellery Says:
July 22nd, 2008 at 5:23 pm
Last I checked, NYC had not been annexed into the Canadian Dominion…..
_______
That’s too bad. Couldn’t we have all the blue states? America doesn’t want them anymore. I heard it on Fox.
I bet we could buy them really cheaply now. We could trade a couple of our Vancouver Specials for Manhattan. And I am sure we cold swap Coal Harbour for San Francisco. My model tells me this works. Especially with the strong Loon.
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jesse Says:
July 22nd, 2008 at 5:33 pm
“Note that ‘housing’ in the above refers to shelter, i.e. the consumption of housing.”
Correct, though this includes principal and interest. Also note capital gains are not included in the income calculation (link).
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AHandle Says:
July 22nd, 2008 at 5:41 pm
I can start with nothing, spend more than I earn my entire life and retire wealthy? Now just how can I pull that off?
You can’t what you can do is have a negative “savings rate” for your entire life and end up wealthy by investing. The example I first gave had a -8% savings rate but would end up with a pretty healthy nest egg in the end.
Do you understand now?
Those are fine definitions and I agree with them but they are not how the government calculates savings rate so they are not relevant to this discussion. It really isn’t that hard to understand the metric doesn’t mean the same thing in common usage as it does in this usage. All sorts of fields have strange jargon that doesn’t mean what it does in the rest of society.
Once again Savings rate ignores investments and the capital gains acquired from investments. Do you understand now?
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jesse Says:
July 22nd, 2008 at 5:48 pm
“…Savings rate ignores investments and the capital gains acquired from investments.”
Yes so BCers are either unbelievably shrewd equity investors or have lots of real estate that is being sold or re-financed. What will a homeowners do when there is little to no home equity left to re-finance?
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ellery Says:
July 22nd, 2008 at 5:48 pm
AHandle,
That’s very interesting What you are describing matches the savings (or “savings”) practices of most people I know, actually. My 2¢.
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AHandle Says:
July 22nd, 2008 at 5:48 pm
http://www.bcstats.gov.bc.ca/p.....bi0207.PDF
A good read direct from the bcstats division. Pay attention to this bit:
“It has been argued that the long-term decline in
the savings rate is really just a statistical construct
because some types of income, which are becoming
increasingly important, are excluded from
this measure.”
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patriotz Says:
July 22nd, 2008 at 6:07 pm
Yes but that decline just happens to be accompanied by a long-term increase in personal debt. There’s your check on the statistics.
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ellery Says:
July 22nd, 2008 at 6:19 pm
“Yes so BCers are either unbelievably shrewd equity investors or have lots of real estate that is being sold or re-financed.”
Or they just do exactly what the bank suggests: make maximum contributions to your RRSP, investing in mutual funds. There are some problems with that model (for example most mutual funds have commissions which hurt your long term savings). Equity investing? Yes, in most cases. Unbelievable shrewd? It doesn’t matter for the model. I do find it interesting that money market accounts and bonds are not included in the discussions among my peers.
Additionally, AHandle’s off the books savings model would include people who are diligently making the bi-monthly payments on their new mortgages. Again, there are problems with the model (like the people who don’t have leftover money for savings or extra student loan payments), and they may be financially vulnerable. But it’s not exactly the buying-fancy-cars-on-the-Visa-and-an-iphone-on-the-HELOC model which was suggested upthread. Although the 10% higher consumer-spending of BC residents, if it’s true, is notable.
I know of 1 serial refinancer. Guess what they refinanced to buy. Did you guess more real estate?
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ellery Says:
July 22nd, 2008 at 6:32 pm
“Yes but that decline just happens to be accompanied by a long-term increase in personal debt. ”
People who are stretched thin by big monthly expenses, like mortgages, need to rely on little bits of debt to get by. If you convince people to take on the big debt, then they will need more debt. This is why selling debt should be better regulated. Everyone should have to study personal finance in school, and study sharecroppers in their history books.
Some credit companies have stopped using the word debt. They say “fast cash”. Mastercard’s “Priceless” campaign brilliantly targeted people’s natural aversion to debt. The normalizing of debt as a part of life is a serious problem. I wish it just affected dumb people, but unfortunately if I have to bid against dumb people with access to leverage for a house, or even investments, I often lose, too. Better interest rates on my savings would take the sting out a little.
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VancouverGuy Says:
July 22nd, 2008 at 7:01 pm
“Once again Savings rate ignores investments and the capital gains acquired from investments. Do you understand now?”
I still don’t see what you are saying based on the definition Jesse posted. The only thing excluded is capital gains income. So if you have a negative savings rate but you are excluding capital gains income, and that is where people’s excess cashflow is coming (not from debt), then that is an entirely unsustainable situation. At some point, you have to save in order to have the capital to invest (unless you are just taking on debt to invest). If I started life with a negative savings rate, the only way that I could sustain that savings based on capital gains income is if I took on debt to fund both my current consumption and to fund investments, and then made a capital gain on my investments in the future to cover the cost of my debt. Similarly, it is unsustainable for an economy to have a negative personal savings rate because the same thing should occur. People’s capital gains are finite, and in the case of BC, will soon be nonexistent. More likely, and what statistics show, is that people are increasing their debt in order to fund their current expenditure.
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jesse Says:
July 22nd, 2008 at 7:02 pm
“Or they just do exactly what the bank suggests: make maximum contributions to your RRSP, investing in mutual funds.”
Yeah, but BC is NOT unique in this respect. It’s not like investing in mutual funds with high capital gains is some unique gift awarded to people west of the Rockies. Investing in RRSPs comes from savings, according to Statscan anyways, so would not affect PSR.
It could be that BCers pay down their mortgage faster than other regions of the country but according to Statscan the average debt load amongst homeowners has increased in the past 5 years, suggesting that overall debts are not being repaid at an accelerated rate; instead people are taking on more debt, likely partly by refinancing or moving to a more expensive property.
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AHandle Says:
July 22nd, 2008 at 7:31 pm
Vancouverguy,
An Example
Year 1 – I invest 100,000 dollars – My ’savings rate’ is 100%
Year 10 – My investment has grown to 150,000 dollars. I withdraw 50,000 and buy something. My “savings rate” at this point will be 50%. Because I have earned income of 100,000 and spent of 50,000.
Year 30 – My investment has grown to 150,000 dollars again. I withdraw another 50,000 my “savings rate” is now’ 0%
Year 35 – I die and my children inherit 120,000 dollars from there spendthrift parent who never saved a dime.
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Anonymus Says:
July 22nd, 2008 at 8:50 pm
Looking at her picture, Ms. Diane McLeod clearly spent all that money on Big Macs and Coke. At least she has something to show for it (like 50 extra pounds)…
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Anonymus Says:
July 22nd, 2008 at 8:54 pm
“There’s a meme in the local media that Canadians are more financially conservative than Americans”
Translated, this means: Americans are in it up to their ears, Canadians are in it up to their chest.
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patriotz Says:
July 22nd, 2008 at 9:25 pm
Year 1 – I invest 100,000 dollars – My ’savings rate’ is 100%
A savings rate of 100% means you save all your disposable income, i.e. your living costs are zero. How are you supposed to do that? Possible for a kid with a paper route but not anyone else.
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M- Says:
July 22nd, 2008 at 10:03 pm
Anonymus#79 – don’t forget her cigarettes as well!
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ellery Says:
July 22nd, 2008 at 11:48 pm
“Yeah, but BC is NOT unique in this respect. ”
No, of course. I didn’t mean it was. Sorry. I was just pointing out how someone could be putting away money and not fitting into the definition. I know people who fall into that category. By RRSP, I meant invested monies, not cash RRSPs.
I think it’s apparent that high cost of living (ie housing costs) must be playing a role in our savings rate. The best indicator that a person will go bankrupt isn’t being a spendthrift, it is having a fixed cost of living (housing, car payments, student loan) you have indefinitely or for many years ahead.
You can theoretically curb your consumption of TVs and lattes if you lose your job, but fixed payments are…fixed. Lose your job and you’re done…unless you can use the asset, which is causing the high fixed cost of living, to borrow against when you lose your job. Then you can keep up the consumption. Cripes. It seems to me Diane’s economic model is just the Greenspan model, actually.
It’s also a telling change in attitude that you should put all your savings in the stock market/housing or other asset which will theoretically go up. Cash savings has gained a bad reputation and leverage is considered “smart” and the way to finish rich. Have you noticed how many people talk about buy and hold? A crash is built in to the model, and people are bracing themselves not to weaken and give in when it happens, but to be “smart” and buy more when the market is done. It seems cynical.
In a way, I think Stats Can has a point. Can you count savings that can disappear or diminish significantly in a crash? Economic models aside – just common sense, I mean.
How much money is generated every year from selling money.
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Anonymous Says:
July 22nd, 2008 at 11:58 pm
My(!) real savings rate:
(Net-Equity-Beginning-of-Year – Net-Equity-End-of-Year) / Gross-Income-per-Year
Note: Gross Income including realized investment income (e.g. rent)
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ellery Says:
July 23rd, 2008 at 12:00 am
correction:
____________
I think it’s apparent that high cost of living (ie housing costs) must be playing a role in our savings rate. The best indicator that a person will go bankrupt isn’t being a spendthrift, it is having a fixed cost of living (housing, car payments, student loan) you have indefinitely or for many years ahead.
____________
I meant a fixed cost of liviing which is not within your means.
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patriotz Says:
July 23rd, 2008 at 12:46 am
I think it’s apparent that high cost of living (ie housing costs) must be playing a role in our savings rate.
Rental costs as a % of income are no higher now than they were in prior decades.
On the other hand when renters purchase housing at inflated prices, it does decrease their savings rate, as I pointed out in post #64 above. The ownership rate has increased substantially during this decade so it is definitely a component of the reduced savings rate.
People trading up to bigger houses than they need, who I call the “live-in speculators”, also reduce their savings rate.
So do the cash-flow negative specuvestors, for obvious reasons.
But the increase in market price in housing makes no difference to those who have already bought and stay put, unless they take advantage of that increase to refinance and increase their spending. That’s negative saving.
In summary yes the housing bubble has led to a decrease in savings, but it was entirely voluntary on the part of the dissavers. No renter or specuvestor had to buy and no owner had to trade up or refinance.
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Anonymous Says:
July 23rd, 2008 at 6:32 am
re #79 – look again – she also smokes.
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jason Says:
July 23rd, 2008 at 7:27 am
indymac a MAJOR bank?
hahahahaha…ooohhh, hahahahahaha!!!
with assets of 32 billion, that is NOTHING compared to the 1.5 TRILLION that citibank has even with its small 20 billion in losses. i never even heard on indymac until it got into trouble. largest bank failure in history? yeah, sure, if you look at the other top three at the 2 billion mark. peanuts.
tell, me oh great business guru’s of canada…where is YOUR google? microsoft and boeing? oh, wait…you make…ummm, nothing of world note.
how fast bc’ers forget about the bank of bc failure. what? forget already? forgot that hong kong bank took it over and scotia bank? does hsbc ring a bell? what happened to national trust? wow, hurts when someone actually knows something, doesnt it?
cant fool me boys, been around the block. keep that stupid ignorant opinionated narrow minded envious hate filled attitude that i happily left two decades ago.
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crabman Says:
July 23rd, 2008 at 8:21 am
Guys,
Don’t feed trolls… ignore them and they will go away.
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dude Says:
July 23rd, 2008 at 8:35 am
Citibank’s 2.19 trillion of assets doesn’t amount to much of anything if accompanied by 2.07 trillion of liabilities.
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jesse Says:
July 23rd, 2008 at 8:44 am
“But the increase in market price in housing makes no difference to those who have already bought and stay put, unless they take advantage of that increase to refinance and increase their spending. That’s negative saving”
Yes and for a -8% savings rate for the entire province it is not just people who moved to more expensive houses or were first-time buyers in the past 5 years (who are a relatively small fraction of total owners) who are tapping into savings and taking on debt to support current spending.
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Drachen Says:
July 23rd, 2008 at 8:45 am
Jesse
“Income from investments is part of personal income.”
Yes, absolutely. The quote Anon had was referring to unrealized gains which are (correctly I believe) not included as income.
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VancouverGuy Says:
July 23rd, 2008 at 8:53 am
AHandle,
Your example of someone who saved all their money once and then retired with surplus funds is not equivalent to a negative savings rate across a population on average over time. Yes, one person can save money upfront and then have a negative savings rate in the future, as that is what retirees do, but if your entire population has a negative savings rate it means they are overall reducing their savings and potentially either selling assets in order to get by or going into debt. That was the point I was trying to make.
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Drachen Says:
July 23rd, 2008 at 8:55 am
Jason
“here is a little objective reporting”
Wow, he’s fair and balanced!
“i HIGHLY doubt that the canadian standard of living will ever be as high as the american standard of living.”
Umm not according to any international ratings, Canada beats the US hands down. It has since there have been rankings…
I won’t even go into all the other crap. That’s about the most ignorant bit o’ crap I’ve seen in a while (I no longer look at Thumb’s posts). Call back when you’re literate and you actually have a basic understanding of what it is you’re trying to say. As it is you sound like a fourth grader (and not an especially smart fourth grader) waxing on about world politics. Just leave it to the adults and go back to your guns, your bible and your expanding waistline.
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ellery Says:
July 23rd, 2008 at 8:56 am
“Rental costs as a % of income are no higher now than they were in prior decades.”
I thought it was clear I was referring to mortgages.
“In summary yes the housing bubble has led to a decrease in savings, but it was entirely voluntary on the part of the dissavers.”
Yes, fine. That wasn’t my point. Maybe there is only room for one point on this board.
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Drachen Says:
July 23rd, 2008 at 9:00 am
Jason
Why are you so angry? If there’s really nothing wrong with your neck of the woods you’d think you’d just happily go on your merry way. Is your fourth grade education letting you down? Perhaps Krrish can put in a good word for you and you can get a warehouse job like him!
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Drachen Says:
July 23rd, 2008 at 9:04 am
Jason
Please tell me you weren’t ‘educated’ here (I put the quotes because it seems you aren’t really very educated at all (and I put the note in brackets because otherwise you’d likely not pick up on the subtle dig)).
Do you know something? That has yet to be proven… Right now you’re doing more to affirm the view of the ignorant arrogant American than anything else. Maybe if you weren’t so angry and illiterate it would help.
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jesse Says:
July 23rd, 2008 at 9:12 am
ellery: “I thought it was clear I was referring to mortgages.”
I think the point was that someone has the choice of buying a property for a significantly increased cost compared to renting and this decision contributes to a decrease in the savings rate (though this decision cannot in itself put one’s PSR negative — this definitely goes for those who bought within the past year). I don’t think patriotz is disagreeing with you, only pointing out that people are willing to spend more owning than it would cost to rent the same property and that is absolutely unsustainable.
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ellery Says:
July 23rd, 2008 at 9:17 am
“a significantly increased cost compared to renting and this decision contributes to a decrease in the savings rate”
yes, this is what I think, too.
“people are willing to spend more owning than it would cost to rent the same property and that is absolutely unsustainable.”
point taken.
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Moldcity Says:
July 23rd, 2008 at 9:37 am
Anyone with half a brain could see this housing market crash coming for years, the penchant for debt both in the US and here in Vancouver just means the crash will take longer and go deeper than it would have in a normal correction.
Of course as risk gets priced back into the housing market that just makes borrowing more expensive:
http://www.nytimes.com/2008/07.....=permalink
What kind of idiot thinks house prices can keep going up forever without incomes rising?
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Time Says:
July 23rd, 2008 at 10:22 am
What kind of idiot think housing prices are not supported by fundamental???prices are in line with Increasing income,low interest rates,rapid rental yeild growth,rich migration,and of course beautiful city “In The Best Place On Earth”-Captain Jack Sparrow.
http://www.ohjohnny.net/potc2/MrJuly.jpg go buy home today and enjoy your life.
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crabman Says:
July 23rd, 2008 at 10:36 am
Moldcity asked:
“What kind of idiot thinks house prices can keep going up forever without incomes rising?”
Time/satv/krissh/thumsup said:
“prices are in line with Increasing income,low interest rates,rapid rental yeild growth,rich migration,and of course beautiful city”
Moldcity, your question has been answered!
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blueskies Says:
July 23rd, 2008 at 10:39 am
Nearly half of immigrants remit cash: Statscan
http://tinyurl.com/richimmigrant
…so in effect they are not buying real estate
and another one bites the dust……
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jesse Says:
July 23rd, 2008 at 10:55 am
“Nearly half of immigrants remit cash: Statscan”
I wonder how many of these remittances come from people with negative savings rates.
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betamax Says:
July 23rd, 2008 at 11:26 am
The current situation on the street:
A Vancouver repo man was interviewed on the radio yesterday; he said they’re run off their feet repo-ing Mercedes, Hummers, and boats of all types. There’s a leading indicator for you. As someone in the USA said last year, the repo man is 6 months ahead of a CNN headline.
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umdesch4 Says:
July 23rd, 2008 at 11:33 am
Hmmmmm….CIBC Class Action Lawsuit?
http://www.cbc.ca/money/story/.....wsuit.html
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Time Says:
July 23rd, 2008 at 11:36 am
“Most of family class immigrant buying homes in vancouver with in three year of their residency but rich immigrant and migrants are buying right away”.-Keanu Reeves.
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jesse Says:
July 23rd, 2008 at 11:42 am
Pope, OT, a suggestion on site layout. I would put links to other sites at the top of the right column as people will start to use this site as a portal if the links to other sites are immediately available without clicking or scrolling. My $0.02 (and yours, since you’re using GoogleAds).
Also I expect most people are using larger screens or higher resolutions so you can expand the format to eliminate vertical white space and put more stuff on one screen in the side columns.
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Coco Says:
July 23rd, 2008 at 4:16 pm
Some people can’t understand why others get in debt. A few years ago, I had the opportunity to question two different people on how they accumulated all their debt.
Male 48 years old – Single, never married, no children, rents mobile home owned by Uncle (cheap rent), owns a 15 year old car (also previously owned by Uncle), 25k in credit card debt, no personal savings, has never owned property. Reason for debt…too many electronics, cd’s, dvd’s and refuses to cook for himself. Eats out several times a day. Now, a restaurant meal out 2 or 3 times a week can cut into a person’s budget, but 2 or 3 meals out everyday is another story and we are not talking McDonald’s here.
Female 32 years old – Single, never married, no children, owns townhouse with minimum down payment, car loan, 10k worth of credit card debt, no savings. Reason for debt…buys things she can’t afford on her salary. Designer clothes, vacations, etc. accumulates on the credit cards and when their is a maintenance problem with the car or the townhouse, she is in crisis mode on how to pay for it.
BTW – I taught the female how to manage her spending better and she got out of debt in 3 years. The 48 year old once again is in a failed relationship, I guess he can’t find a woman to pay off his debts or likes his spending habits?
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Aleks Says:
July 23rd, 2008 at 5:08 pm
“It has been argued that the long-term decline in
the savings rate is really just a statistical construct
because some types of income, which are becoming
increasingly important, are excluded from
this measure.”
Quotes like this always read as “it’s different this time” to me, and it’s never different this time. Even in a perpetually rising housing market, it makes no sense to borrow money to spend it on depreciating assets like cars and flatscreen TVs. No matter what your house value does, your debt doesn’t go away. Either you never pay off your mortgage, in which case you don’t ever really own it, or else you sell and go back to renting. Because in a perpetually rising market it’s not just the price of the house you sell that’s going up, it’s also the house you buy.
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Time Says:
July 23rd, 2008 at 5:19 pm
MORTGAGE DEBT IS LIKE SPENDING MORE TO SAVE LATER.
one of this case where low income couple bought a property worth $80,000 five year ago rent for type of suite was around $500 that time,last year husband walked away but this lady is able to manage that appartment despite low income around $1200 per month after tax,$200 child benifit $200 child maintenance this unit is worth around $215,000. in othercase she must pay $1200 rent for similar (765 sq.ft.) unit she own in mount pleasant area while she is paying only $500 mortgage and $165 for maintenance.
I think people who think they are intelligent they should figure out that mortgage debt is not actually a debt but mortgage debt is a kind of spending more to save later,Would We Call Them Progressive Conservatives Yes “buyers in vancouver are smart home buyers”.-denzel washington.
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Smartguy Says:
July 23rd, 2008 at 5:27 pm
Time,thums,browntown et al.
Not once have you offered anything intelligent.
What is it you’re trying to say?
Are you just trying to derail the blog with stupid, incorrect and incoherent statements? Or do you actually believe you’re contributing here?
Mortgage Debt is a Leveraged Investment but it is still debt.
Assets-Liabilities=Net Worth
Time=freaking idiot
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blueskies Says:
July 23rd, 2008 at 5:27 pm
last year husband walked away
satv:
did you really walk away and leave her in the lurch…
i am disappointed in your cavalier attitude towards parental responsibilities…..
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BDK Says:
July 23rd, 2008 at 5:31 pm
You’re right Smartguy.
Time/Browntown/Krissh etc. is an idiot.
It even denies knowing Krissh because it’s so stupid and it is just trolling on here because it has nothing to do when it’s not at the warehouse or leaving his low income wife with the kid in their mt pleasant studio.
http://vancouvercondo.info/for.....3&t=48
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Vanguy Says:
July 23rd, 2008 at 5:44 pm
Anybody paying attention to Woodwards site?
I work nearby and I haven’t seen the cranes move or anybody work on it for many days. They were doing well putting up glass and they got stalled seven floors from the top.
Yesterday, I took Helijet and the cranes were at the same position when I left at 7am and when I got home at 5pm. They have cranes on both the school site and the condo site, and neither seemed to move.
Maybe they’ve moved inside but it sure seems dead.
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Time Says:
July 23rd, 2008 at 5:59 pm
keep on freaking idiot #112 your math is wrong!if you can pay monthly payment just get in! problem solved! then no matter where the market goes???? you are in for 4sure!!!!Smartguy?actually you are not smartguy unless you are “smart buyer”-got it?
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Anonymous Says:
July 23rd, 2008 at 6:01 pm
…that is NOTHING compared to the 1.5 TRILLION that citibank has…
You’re kidding, right? That $1.5T is the notional value of its entire derivatives portfolio, and in practice is roughly evenly split between payables and receivables. You can walk down to Wall Street *today* and buy the whole damn company for ~$120B.
Citi was also bailed out earlier this year, to the tune of roughly $25B. It is not clear whether more bailouts are coming, or if the convertible structure of the bailout is a de facto death spiral. What is clear is that the bailout was from oversees – which combined with Citi’s then-existing ownership means the damn thing doesn’t even qualify as an American company anymore in anything but name.
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ellery Says:
July 23rd, 2008 at 7:36 pm
“Quotes like this always read as “it’s different this time” to me, and it’s never different this time.”
That’s true. However, if there are ways of putting money aside which are not classified as savings, in the conservative governmental model, but which are counted as assets by the bank, that says something about contemporary attitudes about financial responsibility. Someone with little cash, but a mortgage and investments is hearing from their family and friends that they are being smart. Are they being smart? What is too much risk? The mortgage mess is clearly a part of something much bigger. That’s what interests me, and since this thread is on debt, I am bringing it up.
If you haven’t already heard it, listen to “The Giant Pool of Money” on NPR. It is an interesting summary of the credit crisis, and especially does a good job connecting the everyday people with mortgages and the big lenders. One of their points is that globally, lots of people had liquid cash (ie citizens of China and India whose earnings had been increasing) which needed a home. Alan Greenspan lowered interest rates, meaning that there’s not going to be much return for that global pool of money. Mortgage backed securities were traditionally a safe bet, and their ensuing popularity caused financial institutions to push unsafe mortgages (loosen standards) in order to meet the demand of money waiting to be invested. They were creating investment vehicles out of people. The floodgates are opened, and we all feel the effects, and will do for awhile. Vancouver residents still feel very disconnected from this, but are we?
http://www.thislife.org/Radio_.....sched=1242
That is the part of the credit crisis that doesn’t get as much attention as the people with credit card issues (who I think are popular because we all get to feel superior to them and it’s an easy problem to understand).
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Anonymus Says:
July 23rd, 2008 at 8:05 pm
Best Place on Earth?
“British Columbia is probably home to the largest concentration of organised criminal syndicates in the world.” – BBC
http://tinyurl.com/6dvpuy
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Vansanity Says:
July 23rd, 2008 at 9:07 pm
I drive by Woodwards nearly daily, I don’t know about the cranes but there’s plenty of activity going on there. I’m pretty sure they sold out those units, ITC is the general contractor and they’re big boys, they’ll finish it. You can check the progress on their site http://woodwardsdistrict.com they have a live webcam there in case you’re interested.
I feel sorry for whoever bought there though… maybe not sorry, pity might be a better word. I pity da fool who bought at Woodwards! Welcome to Botswana!
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Any mouse Says:
July 23rd, 2008 at 9:59 pm
Last two day have been very quite at the Woodwards site.
Today it was dead.
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Re-diculous Says:
July 23rd, 2008 at 10:27 pm
Just posted by Paul
Inventory: 19,971 ! (20K – 29!)
S/L 30% (SFH), 37% (Condo)
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Anonymous Says:
July 23rd, 2008 at 10:42 pm
Almost to 20,000! We’re at 19971. 29 units more and we’ll hit the big 20K!
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crabman Says:
July 24th, 2008 at 8:19 am
BC Economic Index Confirms Economy is Slowing.
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Drachen Says:
July 24th, 2008 at 9:07 am
ellery
“Someone with little cash, but a mortgage and investments”
Mortgage and investments are considered savings (or at least payment against the principle on the mortgage is). That Anonymous guy doesn’t know what he’s talking about.
The only controversial issue with “savings” as defined in the personal savings rate is whether asset appreciation should be included before the asset is sold. The government says no and I think that makes sense because most people do not sell at the peak. Our negative savings rate looks bad because it IS bad. If housing truly were the wonder investment that would never fail then the government would be wrong but the fact is most people will see their house’s value drop to equal or less than they paid for it in real dollars.
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ellery Says:
July 24th, 2008 at 9:43 am
“Our negative savings rate looks bad because it IS bad.”
I think so, too. I just thought a shift in thinking about savings might be interesting.
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jesse Says:
July 24th, 2008 at 9:53 am
“Mortgage and investments are considered savings (or at least payment against the principle on the mortgage is).”
Drachen, are you sure principal is considered savings? Can you find a source for this, related to Statscan measure (which we are talking about)? If I read the Statscan definitions I posted previous it seems that the total mortgage is considered PCE. The reason I say this is that in one census year in the ’80s Statscan went out of its way to mention that principal was treated differently from mortgage financing costs in that specific census only:
(link)
So while BCers may be “saving” more than the stats give them credit for they are “saving” in the form of paying off debt. Regardless they are on average negative cash flow without tapping additional sources of money.
I think the best way to look at it is that a negative savings rate is effectively a negative cash flow that needs to be supplemented by drawing down savings or taking out debt and BCers are unique in Canada in this respect. As vancouverguy pointed out this has to reverse unless capital gains can continue forever (looking unlikely).
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Drachen Says:
July 24th, 2008 at 10:05 am
Article with definitions
I think it’s pretty clear. Paying down any kind of debt is considered savings, why should a mortgage be different?
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Drachen Says:
July 24th, 2008 at 10:07 am
Jesse
Oh and by the way, the only place where you can find reference to principle payments they are considered savings. From this you conclude that principle payments are not considered savings? You’re beginning to sound a bit Krrishy.
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jesse Says:
July 24th, 2008 at 10:27 am
“Paying down any kind of debt is considered savings, why should a mortgage be different?”
Are you suggesting the -8% savings rate quoted by Statscan does not use their own definition of savings rate? Please. Use whatever definition you want but IF we’re talking about -8% savings rate as quoted by Statscan then we need to use their definition, which includes mortgage principal as part of PCE.
The Statscan measure is all about cash flow which is why debt repayments are not considered savings. But by all means, do your own calculations.
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Drachen Says:
July 24th, 2008 at 10:44 am
Jesse
You’re messed up, I went and read it on the StatsCan page, in context your quote doesn’t mean what you think it means.
They categorise each type of savings and expenditure.
One category is “Housing”
Another category is “assets and debts”
In most surveys “Housing” includes (Mortgage payment – Payment against principle).
In 1982 “Housing” included total Mortgage payment and Payment against principle was included under “assets and debts”
The end number for personal savings rate is the same it’s just a matter of where the accountants recorded the numbers. Try re-reading your quoted passage with this in mind.
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Drachen Says:
July 24th, 2008 at 10:49 am
Jesse
By the way there’s no need to get snippy with me. You’re reading it wrong, I’m not suggesting that they don’t use their own definition, merely that you’re misinterpreting the definition because you probably haven’t taken any bookkeeping classes. What they’re talking about (in your quoted passage) is minutiae of bookkeeping principles not something that has an effect on the end number generated.
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jesse Says:
July 24th, 2008 at 11:25 am
“What they’re talking about (in your quoted passage) is minutiae of bookkeeping principles not something that has an effect on the end number generated.”
Hi Drachen, OK I’ll take your word for it. I don’t disagree that paying off debt increases equity.
I still do not have closure, from a definition on Statscan’s site, on whether mortgage principal is included as savings or included in PCE, as it pertains to the -8% savings rate statistic. I am trying to resolve if the -8% savings rate is a true measure of cash flow or not.
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Woody Says:
July 24th, 2008 at 11:32 am
Haha no progress at Woodwards, maybe you need to open your eyes. The first tower is going to top out next week, thats why there is less movement, they have finished the first tower and have moved to the second shorter tower which just cleared the podium. The project is ahead of schedule.
I feel sorry for everyone that bought there too, gee having paid on average $525psf even if the market pulls back 25% they are still laughing.
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Bubble Lad Says:
July 24th, 2008 at 11:58 am
Here’s one from the Wayback Machine: anybody up to ’splainin’ the Savings and Loan Crisis of the 1980’s? Wasn’t it eerily familiar, and wasn’t Dubya’s dad and brother also intimately involved. Extra points for good penmanship.
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bdk Says:
July 24th, 2008 at 12:17 pm
“gee having paid on average $525psf even if the market pulls back 25% they are still laughing.”
Ummm, Woody this is the poorest postal code in Canada with the highest level of HIV in the developed world.
It’s not like any of the mental health and Addiction treatment centres will be packing up and leaving because of a two new towers.
These centres are unwelcome everywhere they go (google NOT IN ANYONES BACKYARD if this isn’t obvious to you.
Remember VHB pointing out only 49% of Pt Grey residents could afford to buy at the poorest postal code in Canada?
The Woodwards project will be such a disaster, it has all the ingredients, mentally troubled drug addicted residents, specuvestors who’d never dream of living there, Koreans who thought they were buying in Coal Harbour.
It’s going to be sad to see all these people who thought they were being smart lose all their money.
No one in their right mind will pay $250/sq ft to live there and the max anyone will ever get in rent is $1/sq ft and th turnover will be huge so expect to pay the property manager a lot of placement fees!
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gah Says:
July 24th, 2008 at 12:19 pm
For those looking for the next bubble to invest in, what about bubbles?
http://www.cbc.ca/consumer/sto.....pagne.html
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Drachen Says:
July 24th, 2008 at 12:20 pm
Jesse
“I am trying to resolve if the -8% savings rate is a true measure of cash flow or not.”
I think it is. There are several factors which contribute.
Increasing number of retired or semi retired people. They are living largely off of savings.
Increase in home equity. If people get a HELOC or a second mortgage that drops their savings rate. For example. A house purchased in 1987 for $150k which is now evaluated at $700k only counts for $150k of savings (the amount paid against principle) and if the home owners take out $100,000 from their HELOC to get a pair of Mercedes they are considered to have dropped $100k of savings (even though some people would argue they have gained $450k in savings through the whole transaction).
Increase in housing costs and the illusion of endless wealth generation through housing. Many couples are piling on debt on credit cards, lines of credit etc. to make their mortgage payments each month because they believe this is financially prudent and as their earnings increase through their careers they can pay off the debts.
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Bubble Lad Says:
July 24th, 2008 at 12:45 pm
I’d love to see the DTES brought back into some kind of balance, but Woodwards seems like a disaster – a little hermetically sealed world on the edge of one of the most heart-wrenching spectacles in Canada. I’m presuming people who would want to ACTUALLY live there are aware of the problems and the depressing cavalcade of human misery it presents on a daily basis.
Boneta’s, right down the street from Woodwards is one of my favorite restaurants, but to get there you have to dodge spent hypos, human feces, and people openly shooting up or smoking crack, trying to sell you the coat off their back (I’m not making this up).
I can’t imagine dealing with that on a daily basis. It would become an exhausting ordeal. Either that or the people who bought have no intention of living there, or being involved in the local community in any way, shape, or form. Neither option seems particularly palatable.
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Woody Says:
July 24th, 2008 at 1:17 pm
Think it’s best that people check back 5yrs after completion to see if they change their minds. Yaletown was once a dump as was Coal harbour, the first residents there all took chances and are now rewarded.
What Woodwards will bring who knows but to assume the DTES will continue on asis indefinately is even more naive.
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jesse Says:
July 24th, 2008 at 1:26 pm
“Increasing number of retired or semi retired people.”
There is a possible component of offshore savings and investments not tracked through Statscan and black market proceeds. Your other points sum up the situation nicely.
Given the average mortgage debt has increased in the past decade in conjunction with a falling savings rate indicates that a significant portion of the shortfall comes from home equity withdrawals. As I mentioned earlier a recent property market entrant will likely not have a negative savings rate (save unsecured loans) so it makes you wonder who’s briging down the number below zero? The retired and semi-retired don’t make that much of the population yet.
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Bubble Lad Says:
July 24th, 2008 at 1:40 pm
I don’t think Yaletown and Coal Harbor are fair comparisons, as these areas were basically EMPTY when they were developed. Bringing up (or down, comparing on your point of view) the DTES to their “standards” involves moving a large population of human beings who, for better or worse, call that area home.
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betamax Says:
July 24th, 2008 at 2:49 pm
if the market pulls back 25% they are still laughing.
25% will be just the beginning, and they won’t be laughing.
to assume the DTES will continue on asis [sic] indefinately is even more naive.
Agreed. The DTES will be worse later, when the long-term recession arrives, combined with higher energy costs, and both provincial and private coffers are depleted paying for past megaprojects and general over-capacity. No shades required.
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Bubble Lad Says:
July 24th, 2008 at 4:12 pm
betamax – I agree – not to mention all the funky businesses that are down there now taking advantage of the cheap rent (like my fav – Boneta’s) that are going to be be forced to close because everyone’s disposable income is the first thing to vanish in a recession.
If the boom had continued for another 3-5 years, the DTES might have had a chance. I think the Woodward’s building is going to prove to be the high water mark for “development” down there.
The irony is that it stands a solid chance of going right back to where it started – a squat for everyone who lives in the area right now.
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VancouverGuy Says:
July 24th, 2008 at 4:51 pm
If the market pulls back 25% they won’t be laughing. If downtown condos are at $650/sf right now, a 25% pull-back would leave you at $488/sf. If you had equity of 25% initially, you would lose 28% of your initial capital. Ouch. If you had more leverage, you lose more money. If you had 92% leverage, you’ve lost it all. Theoretically, if you only had to put down like 10%, you are almost equity negative and you could potentially walk away.
Do they require a personal guarantee on those obligations? Would they allow me to buy assignments using a special purpose vehicle? Are they sophisticated enough to know what that means (non recourse to the owner)?
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Drachen Says:
July 24th, 2008 at 6:49 pm
jesse
“so it makes you wonder who’s briging down the number below zero?”
Another big one from what I understand is boomers withdrawing home equity to help finance their children’s homes.
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blueskies Says:
July 24th, 2008 at 7:20 pm
woody:
do you have an assignment or unit at “W”?
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bdk Says:
July 24th, 2008 at 8:47 pm
Woody.
Coal Harbour didn’t have the highest concentraion of social services, HIV, Mental Addiction and the most impoverished postal code in all of Canada and when Marathon Lands started selling Coal Harbour it wasn’t $525 sq/ft either.
Comparing the most desirable area of Vancouver with the Slum of all of Canada is not compareable and the junkies won’t give a sh*t if two towers go up.
Yaletown was nothing like the downtown eastside either.
You must be joking around if you think $525 sq/ft is a good deal.
Qube was $500 sq/ft and will be again soon as a landmark building in a nice area should be.
The Woodwards project will be the epitome of everything that’s wrong with the bubble and will easily lose as much as the worst of the California, Las Vegas or Florida bubbles.
The residents will be reminded of this when they find dirty needles in their elevator and have people smoking crack outside the parkade gate.
No concierge will want to work there.
I hate to pick on you Woody but what you said is just so assinine it deserves ridicule.
Do you understand that the average incomes of Vancouver?
Is it going right over your head that only hte elite can afford to pay those prices and none of them would be stupid enough.
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Time Says:
July 24th, 2008 at 9:12 pm
“Coal Harbour didn’t have the highest concentraion of social services, HIV, Mental Addiction”
If you think Gastown has it then question is where do they come from?I think they were us before and now it’s them.
“and the most impoverished postal code in all of Canada.”
So what?Is there anybody in gastown ever wanted to move out from that place?Answer is NO!
Do we have more listing in gastown than downtown or coal harbour?
Answer is NO!
“The Woodwards project will be the epitome of everything that’s wrong with the bubble and will easily lose as much as the worst of the California, Las Vegas or Florida bubbles”
So your motive is bubble campaign why are you wasting time making stuff up?why are you hunting “W” for crack? while your previous worried were washed away without any lose?I mean to say all those spectrum,la hermitage,raffles,and alberni!hey!you never returned back to report any bleeding?at the end why don’t you simplly admit that you are an idiot!!!!!in fear and in your own dreams making stuff up to hide what have you done before?,please take exit no.11(legs).
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blueskies Says:
July 24th, 2008 at 9:17 pm
time:
“W” an intellectual RE roadkill property
“be bold or move to the suburbs”
a marketing campaign that’ll
come back to haunt you
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Drachen Says:
July 24th, 2008 at 9:42 pm
Time, Krrish, whoever
Do you really think that the W is part of Gastown and not the DTES? I suppose that explains a lot about you. If you thought there was a profit to be had in green skies you’d believe the sky was green too.
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trauma scene cleanup Says:
July 25th, 2008 at 5:58 am
it used to be that you could make mistakes when you were young but it wasn’t so extremely destructive. Now with companies begging you to take their credit cards, a young person can literally rack up hundreds of thousands of dollars in debt… It’s wrong and something should be put in place to not allow it… Middle aged plus people that rack up that kind of dept, tough you should have thought about it before you maxed out all your cards…
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Woody Says:
July 25th, 2008 at 10:22 am
No I don’t have an assignment at Woodwards, I wish I did as they’re worth quite a bit more then they were purchased for.
Like I said earlier wait 5yrs and then report back.