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.
