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TD warns of Canadian ‘debt trap’

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63 Comments

Who’s afraid of debt? Toronto Dominion Bank apparently:

The warning from TD emerged as the Bank of Canada’s latest quarterly update indicated growth in consumer spending growth would slow as household balance sheets are “increasingly” stretched. Mark Carney, the bank governor, reiterated he was “concerned” about household debt, which on a debt-to-income ratio stands at a record 146%.

TD warned that ratio is, in their estimation, headed higher — to over 150% — as interest rates remain abnormally low, with the Bank of Canada policy rate not expected to reach 3.5% until 2013.

The present level of household debt is “excessive,” the report said. Economic fundamentals justify a debt-to-income ratio close to 140%.

Phew! Economic fundamentals justify a debt to income ratio around 140%! That’s good news, only 6 percent less than the current record levels! How hard could that be reach?

Mr. Alexander said debt growth has averaged roughly 8% to 10% a year in the past decade. Meanwhile, disposable income is expected to climb at a modest annual 4% pace, according to TD calculations. This means average debt growth would have to slow significantly to 2% a year — which would be “unprecedented” in a non-recessionary period — for the debt-to-income ratio to reach a more reasonable range of between 138% to 140%.

Oh, I see. Well where is all that debt growth coming from?

..a large part of the debt increase has been due to rising home ownership rates and rising house prices. Homeownership rates are nearing 70%, up from about 66% in 2001.

Hmm.. You mean like in the USA?

“We are not facing a U.S.-style problem,” the chief economist added, “but personal finances have gotten stretched at this point. The big risk is actually if debt picks up from here.”

Even if debt growth slowed from the average 8% to 10% range to a 5% annual pace, this would result in the debt-to-income ratio climbing to 151% by 2013, or roughly 11 to 13 percentage points above a “sustainable” level.

So is anyone doing anything about this problem?

Mr. Carney has repeatedly warned about the perils of households taking on too much debt, saying such behaviour could put Canadians in peril once interest rates begin to climb to so-called more normal levels. The TD report indicated as many as 10% to 11% of Canadian households might become “financially vulnerable” should the benchmark rate climb to 3.5%.

Well as long as they’re being warned everything should work out fine.

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Peter Pan

@jesse: It's hard to wean the debt crackheads when each hit costs a nickel apiece…

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kansai92

Bulls: you know its great that prices are holding and all

but seriously given the amount of economic activity tied

to real estate, we might as well be headed into another

great recession.

Ya, sellers pull their homes off the market, but if your

holding costs are bleeding you in the 1000s per month,

its only a matter of time before you slash and burn.

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VHB

October Projections for month totals

Days elapsed so far 14

Days remaining 6

Average Sales this month 120

Average Listings this month 202

Projected sell/list 59.7%

SALES

Projected month end total 2409 +/- 86

95% Conf Interval lower bound 2322

95% Conf Interval upper bound 2495

NEW LISTINGS

Projected month end total 4033 +/- 118

95% Conf Interval lower bound 3915

95% Conf Interval upper bound 4151

MONTHS OF INVENTORY

Inventory as of September 30th 15401

MoI at this sales pace 6.39

Note: This is a simple linear projection of month end totals.

This provides the answer to the question

"What will month end totals be, if things continue

on the same pace we've seen so far this month?"

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VHB

Dailies – List | Sold

Vancouver East & West*

New Listings – 54

Back On Market Listings – 0

Price Changes – 18

Sold Listings – 44

Vancouver All Areas*

New Listings – 172

Back On Market Listings – 2

Price Changes – 87

Sold Listings – 130

*Attached & Detached – Date: 10/21/2010 Time:22:34 Pacific YatterMatters.com:Courtesy REBGV. Data believed to be accurate but is not guaranteed.

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Basi - Virk

Yes we agree, get rid of the trolls !

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Devore

Thanks for the illuminating conversations today everyone, minus the obvious trolls.

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shawnchong

Waiting for the bubble to pop is like waiting for the fireworks to start.

C'mon, let's get this show on the road already!!!

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Basi - Virk

Carol James

Quit voting us down you dumb beatch

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Basi - Virk

We are in Hawaii with Mr Campbell

He has had to many virgin Caesars is on a bender.

He thinks his approval rating is 90 % (not 9%)

He feels that he must sacrifice a virgin to assure himself of a 4 th term by dropping her into a volcano. He insists on one from Surrey.

Can anyone please help and Fed-Ex one to us ?

Thanks

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jesse

@WFT?: "the easiest way to do it is to tighten mortgage rules and keep low rates"

Mortgage rule changes will only have effect on the margins. The danger is people with mostly paid-off houses — often people nearing retirement — taking out HELOCs that won't be subject to the tighter requirements.

Increasing MBS spreads by backing off government guarantees is an option. At some point higher rates need to come into play or it's bad news in the long term, given how prone Canadians have shown to be to taking on debt in general.

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space889

On the topic of TD, I just read this on Gail Vazoxlade site about how TD is changing all their new mortgage from a conventional mortgage into collateral mortgage. Holy crap is this a sneaky way to rope people in and hold them hostage for life! I bet the account managers will not be explaining all the gotchas/issues with this new mortgage type to clients (assuming they even tell clients that they aren't getting a conventional mortgage).

http://gailvazoxlade.com/blog/archives/2230

All I can say is holy crap this is evil! Though you do have to give TD credit for the way they sneak in this kind evil changes in, and that people just takes it after some token protests.

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Best place on meth

Or better yet, this one.

http://www.youtube.com/watch?v=VL3KuaFvOSc

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Best place on meth

Hi I'm Mark Carney, Governor of the Bank of Canada, and I'd like to take this opportunity to invite you to view a brief instructional video that I'm sure will help you with your financial planning.

http://www.youtube.com/watch?v=Zj8TWETFFXQ

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realpaul

And…lets not forget that the US, UK, AUS all ran into a wall vis a vis the debt/income ratio at far higher rates. Canadians have amassed this debt a record low rates…which means that Canadian debt RISK is FAR higher than any of the other countries. We have nowhere to go but up.

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WFT?

@jesse:

Most of the dangerously high household debt is due to mortgage debt. If the best outcome is to rein in household debt and increase business spending, the easiest way to do it is to tighten mortgage rules and keep low rates.

That would involve the ministery of finance taking action on mortgages, as it has done in the past. We can have the best of both worlds, if only F makes it happen.

That is why I expect tighter mortgage rules on the horizon. The last time Carney repeatedly cited high household debt in the media, he was telegraphing to F that the gov had to take action to curb borrowing. Could he be doing the same thing now?

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Stats Man

@Stats Man: “I don’t know where this 160% figure for the US came from.”

It comes from yesterday’s globe and mail. See the graph at the below link. I wish it was not true but the US had a lot more household debt at their peak than we do not. It sucks but I think we have two more years of debt and house price growth before collapse.

*****

Thanks, but I know where it came from literally.

I was saying that the figure is new because all of stats referenced in the past two years have percentage of income being spent much higher. It seems this is a new convenient stat,

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NO - LYMPICS

44 patriotz Says:

October 21st, 2010 at 1:50 pm

@NO – LYMPICS:

This will simply be a field day for civil servants doing their masters bidding and knowing at worst they will simply be a scapegoa

Basi and Virk were political appointees, not civil servants. That’s not just a subtlety of wording, they are two completely different jobs.

======================================

The Libs have de facto made appointees = civl servants, and also ignored a policy the guilty verdicts should allow the Gov't to proceed with re-imbursement.

Is it possible that a citizen could file a charge under say Obstruction of Justice ?..at least to shake the tree a bit?

I think Gordo is simply cleaning up all the shit before he bails….

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patriotz

@jesse:

They could simply increase rates, and commensurately increase depreciation allowances and partially finance business-spawned capital expenditures.

But that's an on-the-books expense and would increase the deficit substantially if it was any more than a token effort. I think higher interest rates – which, remember, mean a higher CAD – would clobber business and employment no matter what efforts the GoC took to mitigate them, and I doubt Carney would raise rates even if Flaherty asked him to, which itself I doubt would happen anyway.

There is only one effective way to cap consumer spending without collateral damage to export industries and that's to restrict mortgage lending, and I think Flaherty is going to have to do it. The alternatives are just too scary.

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jesse

@VancouverGuy(a): "If there’s so much risk as a result of this increase in debt, why doesn’t the Bank of Canada increase rates to deal with this? Do you think people respond to incentives" I don't think the BoC or the government (bureaucrats) are oblivious to this. Carney has commented before the best outcome is to rein in household spending and increase business investment. Based on the Bank's most recent press release it sounds like they believe household consumption will decrease naturally due to higher debt loads and stagnating asset prices. Of course in the off chance household debts don't start decreasing, the Bank will have no choice but to raise rates. If this happens, as Carney has commented before, it will in itself be bad news for businesses and the economy in general. So what could the government do to… Read more »

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patriotz

@NO – LYMPICS:

This will simply be a field day for civil servants doing their masters bidding and knowing at worst they will simply be a scapegoa

Basi and Virk were political appointees, not civil servants. That's not just a subtlety of wording, they are two completely different jobs.

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patriotz

@Anonymous:

Russia has had a declining population for a decade. In the meantime, real estate prices have exploded.

Only in cities with a growing population like Moscow. Most of the rest of the country is like Detroit.

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WFT?

@Stats Man: "I don’t know where this 160% figure for the US came from."

It comes from yesterday's globe and mail. See the graph at the below link. I wish it was not true but the US had a lot more household debt at their peak than we do not. It sucks but I think we have two more years of debt and house price growth before collapse.

The only way the trajectory will change is if F tightens mortgage rules further or bans amortizations over 25 years.

http://www.theglobeandmail.com/report-on-business…

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fixie guy

"A-Sharp" Accountant Says: Let’s face it bears…For a CRASH, we need higher interest rates."

It wasn't interest rates that brought the US market down and they're still low from a historical perspective. What matters is ease of access to liquidity, of which rates are only one component. Lending standards, mortgage terms, credit in the system, all play into it. I'ld argue the Vancouver market rested on the equivalent of a multi-legged table and kicking a few out, even if low rates remain, will take it down. I also think we're seeing that process begin.

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Anonymous

@patriotzed:

"Monaco has an increasing population."

Russia has had a declining population for a decade. In the meantime, real estate prices have exploded.

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realpaul

But…lets be clear….the low rate policy is also allowing the government to lend itself massive amounts of new debt at ultra low rates which can be magically hidden off the books. Instead of 'new debt' the government renames it 'long term bonds'…..and no ones the wiser… sssshhhhhhhhhhhhhhh !!!

The kids have to be happy about getting such a great return on thier investments of 2025 and beyond. Its a scam like the CPP (unfunded liability) scam. Do you think there will be any pensions available when the debt hits 150% of GDP and theres two retiree's for every worker? Will rich immigrants still be coming when they are taxed at 100%. The magical mystical fraud of low rates and exploding debt can only end badly.

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