Porter: Debt to Asset ratio is key

It’s Debt-week here on Vancouver Condo Info!  Following up on yesterdays story about the Mark Carney interview (which was a follow up on Mondays BOC warning about Canadian debt levels) we have a response from Doug Porter of BMO:

“The continued laser-like focus on debt overshadows the other half of the balance sheet,” BMO chief economist Doug Porter said Monday.

Namely, Canadians are borrowing. But they’re also saving, and they’re worth more than they used to be.

The savings rate has averaged four per cent over the past year and is now below the U.S rate of 5.8 per cent. But Canada’s rate is now more than double the level it was at during its all-time low in 2005.

And as Porter notes, Statistics Canada’s rate of personal savings as a percentage of disposable income doesn’t give the full picture of how much Canadians are actually saving.

The current rate narrowly looks at how much households are saving from current income but ignores unrealized capital gains as well as returns in tax-sheltered vehicles like RRSPs and tax-free savings accounts, Porter said.

A better measure might be to track the change in household financial assets as a share of income. It’s much more volatile (prone to 50 per cent swings in both directions within the same year), but for the last five years, it has hovered at roughly double the published savings rate. And it’s never gone below the conventional “savings rate” in the last 15 years.

Yes, it might be better to use a measurement that’s prone to 50 per cent swings in both directions within the same year, as long as it presently looks good, but what happens if asset prices fall, or interest rates rise?  In his interview Mark Carney pointed out the embarassingly obvious flaw in this argument:

“The debt endures, the asset prices go up and down,’’ he said. “People in Ireland, people in Iceland, people in the United States that took out big mortgages on assets that were worth a lot more for a long period of time, found out that the asset’s not worth very much but the debt’s worth exactly what it was when I took it out.’’

The extreme example would be Japan, where despite long term zero percent interest rates, home prices dropped dramatically over their ‘lost decade‘.  A home owner in Japan would have a very decent debt to asset ratio at the peak of their bubble in 1989, but just five years later that ratio would have gone negative by as high as a factor of ten.

Meanwhile over at BMO, they’ve listened carefully to Mr. Porter and Mark Carney.  After weighing the merits of both points of view they promptly raised mortgage rates as much as .25% for the long term.

39 Comments
newest
oldest most voted
Inline Feedbacks
View all comments
nuxfan

@ RoyceI

"I’d really like to get some basic knowledge regarding investing under my belt, so if anyone can recommend a good book or site to learn from, I’d really appreciate it"

Try Financial Webring Forum, http://www.financialwebring.org/forum/. Good start for any investor.

patriotz

@Ralph Powers: Hey does anyone have stats or know where to find them that show what the debt to asset ratio was in Ireland, or the US earlier this decade? Or Japan in the 1980s & 1990s. What does it matter, when the "asset value" is based on fantasy RE prices? Debt has to be serviced from income. Here's a post from Calculated Risk on debt/income in 2005. http://www.calculatedriskblog.com/2005/12/househo… Reuters quotes Prudent Bear fund manager David Tice expressing concern today that 'credit market debt as a percent of U.S. gross domestic product "has essentially gone parabolic"'. I'm more concerned that Household Debt Service is at an all time high, even with low interest rates. See my Angry Bear post: FED: Household Debt Service Sets Record in Q3 Tice and CR were of course dismissed by the cheerleaders of the day… Read more »

Renting
N

I moved here from NYC and I can assure that Vancouver feels much, much safer. In fact I had two break ins and a couple of other thefts in Park Slope over seven years. I've never had any trouble in four years here living just east of the Drive.

Anonymouse

@Best place on meth:

"Oak Street."

Oh really? You think Oak Street is more dangerous than anywhere in New York? Would you have made that call 2 weeks ago? No? Then you're a troll.

Best place on meth

@Anonymouse:

>>>Where are you most likely to be the victim of violent crime?<<<

Oak Street.

Ralph Powers

Hey does anyone have stats or know where to find them that show what the debt to asset ratio was in Ireland, or the US earlier this decade? Or Japan in the 1980s & 1990s.

real_professional

Sales Alert –

My wife was looking at a house (It is hard to control her from the real estate bug) in White Rock, listed at $649 went for $569 – 12% discount to asking but still about 30k above assessed value.

If you are looking to buy, then 15% below asking and somewhere around assessed is a reasonable place to start.

Although waiting would be an even better place to start.

McLovin

….magicthink. How can any one asset perpetually appreciate against all others and against wages? Eventually not enough liquidity would exist to buy it.

It is amazing how few people understand this simple concept. The idea of house prices rising perpetually over inflation would only be able to exist if people lived forever and never had to sell.

In Amsterdam house prices are more or less with inflation going back 400 yrs. I am sure there were periods of madness such as Vancouver is experiencing now but prices always regressed back to the norm which was inflation.

patriotz

Where are you most likely to be the victim of violent crime?

If "you" means the kind of person who reads this forum, you have very little chance of being a victim of violent crime in either city. It depends almost entirely on your socioeconomic status, or more simply put who you associate with.

Likelihood of being a victim of property crime less so, and probably less in Vancouver than in NYC – i.e. living in an expensive neighbourhood does not protect you from property crime.

5vbc

@fixie guy: Only 15,000 buyers per years are enough to tick the prices higher .They can not hide themselves for more than six months during five year circles.

Anonymouse

@pricedoutfornow:

"You’re more likely to have your car stolen or have your house broken into in Vancouver than in New York City."

Where are you most likely to be the victim of violent crime?

pricedoutfornow

hahaha…Best place on earth!

http://www.cbc.ca/canada/british-columbia/story/2

You're more likely to have your car stolen or have your house broken into in Vancouver than in New York City.

The best place on earth!!!!

fixie guy

21 real_professional Says:"This old belief that housing prices always go up is based on…"

….magicthink. How can any one asset perpetually appreciate against all others and against wages? Eventually not enough liquidity would exist to buy it.

superdumbbear

Yeah the bear CULT index is just a bull trap dumbasses. When it goes down it means that the crash is imminent.

Anonymouse

@Joshua:

"it’s DECEMBER! Listings are seasonally LOW in DECEMBER! Idiot."

The CULT index has been decreasing ever since its creation early this year. Check your facts before calling people idiots.

metalhead

#22

What a pile of outright lies from that guy.

No zero down? This guy advertises in nearly every RE flyer that ends up at my door in Abby.
http://www.yourmortgagesource.org/product-informa

Good to see a bunch of people setting him straight in the comments section.

J.W

Check out this article from The Star written by a real estate lawyer-

http://www.moneyville.ca/article/907383–why-our-

And the easy dismantling over at this website

http://financialinsights.wordpress.com/2010/12/16

How could a real estate 'professional' be so ignorant/misleading? It throws the whole profession into disrepute.

real_professional

This old belief that housing prices always go up is based on the experience of a generation that witnessed rising bond prices – see the chart at the financial post link below. Will this continue? NO. We already noticed a sharp correction in bond prices back to August levels.

Financial Post: Bond investors receive coal in their stocking
http://bit.ly/Bond_Investors

Joshua

@Anonymouse: it's DECEMBER! Listings are seasonally LOW in DECEMBER!

Idiot.

Royce McCutcheon

@rp1: I see some people saving and some people borrowing/spending. Age doesn't really seem to be the factor. What I find significant is that the wealthiest people I know (young and old) seem to be battening down the hatches in terms of where they're putting their money and they seem very concerned about what will happen in the near term. I certainly don't hear the same pro-real estate talk from them that I heard 5 years ago. That's why I value this site: it may be a bit of a bear echo chamber, but almost everywhere outside of here isn't bear-ish enough (or is still acutely bull-ish!). .. Aside: I'm starting out, my household income is now strong, and we've been good about saving. I'd really like to get some basic knowledge regarding investing under my belt, so if anyone… Read more »

Anonymouse

@Best place on meth:

"Who gives a rats ass about the condo tracker other than you?"

The people who thought it would go up after it was introduced certainly cared about it. Now that it's not telling the story they hoped for suddenly the attitude has changed to "who cares about that?".

vancouverite

As I've said on other sites, my son manages a "pay day" loan outlet and has seen an incredible number of people with well paying, professional jobs, coming in, pay stub in hand, to take out a short term high interest loan because they are totally maxed out. If and when interest rates go up it won't take much to send a lot of people over the edge. As an aside, last time he needed a part-time employee over 800 applications were received.

blueskies

hmmmm

new bank slogan

We are liar than you think!

Best place on meth

@Alum:

Who gives a rats ass about the condo tracker other than you?

In 2 weeks we get our final leg down in inventory and then the listings begin anew.

Sellers had better get a jump on things, there's going to be a lot of competition.