Paying debt with debt

This Globe and Mail article starts like this:

A new poll suggests that most Canadians are quite comfortable with using debt as a financial strategy – at a time when debt loads have risen to alarming new highs.

Shouldn’t that be the other way around?  Canadians are quite comfortable using debt as a financial strategy and that has driven debt loads to alarming new highs.

The survey shows 9 out of 10 respondents would consider borrowing money to pay for an unexpected $2,000 cost.  Yeah, that’s right: $2k. These people appear to have little or no financial buffer.

While 55 per cent said they were extremely or very confident they could raise the cash, 92 per cent said they’d consider borrowing to come up with some of the cash.

Less than half – 45 per cent – said they’d never faced a debt problem.

The poll results come as Canadian debt-to-income ratios sit at a record 152 per cent and top officials issue warnings to start paying down debt before interest rates rise.

The findings suggest consumers have been unmoved by warnings that rates will inevitably rise and that the resulting financial burden could sink some households.

“It’s frightening to see that Canadians have become totally blasé about debt – it’s becoming their new ‘normal’ and they’re numb to this dangerous trend,” says Douglas Hoyes, a bankruptcy trustee with Hoyes, Michalos & Associates Inc.

“For many, the use of debt to not only pay for big ticket items like cars, but also to cover day-to-day living expenses, has become commonplace.”

Now compare this to the USA in 2006 where household debt grew at a record level, but a housing boom had also boosted networth.  Some were concerned about unsustainably high house prices, but Ben Bernanke said that he would not prick asset bubbles.

And he didn’t.

In fact the US government did everything in its power to prevent house prices from collapsing.  They pumped money into the system, drove down interest rates and came up with all sorts of programs to prevent people from losing their homes.

You may be surprised to find out what happened to house prices in the US since then, especially the ‘hot’ markets like Florida, Arizona, California and Nevada.

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Just Looking
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Just Looking
Just as I would assume a survey by CREA could be biased, I have to assume a survey by a company that has a monetary interest in the debt market could be biased to produce a certain set of responses. Interestingly, Hoyes does not publish a full copy of it’s survey instrument, just a detailed summary: http://www.hoyes.com/high-debt-details.htm The headline stat “9/10 respondents would consider borrowing money on a sudden $2000 expense” is taken from a question that asks respondents to list their top three likely resources for covering the expense. What they don’t tell us: 1. whether it was an open ended question or whether they were prompted with a list of possible responses. 2. If there was a list, what was the list? If there was a list of 10 things, 7 of them debt instruments, that could produce… Read more »
patriotz
Member

@Anonymous:
BoC does not target exchange rate, they target inflation.

A central bank can only target one of exchange rate or inflation. Also if it targets exchange rates it loses control over interest rates.

If you want examples of exchange rate targeting, look at CHF vs EUR (de facto peg) or HKD vs USD (firm peg).

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VMD
Member

@crashcow:
someone with skills oughta autotune this guy

I did this a few weeks ago : )

yvr2zrh
Member

@Romeo Jordan:

I’m ready to call – nix the 20K party. . . I think I’ve said that for a month now. Very slow listings now and are below seasonal norms.

We have only about 400-500 units on the upside for inventory this year. October closing inventory will come in slightly lower than September. We will have about 700-800 decrease in first week due to expirations. So – – – MOI which is going to be 12 this month will only go up in October with lower sales.

No Free Lunch
Guest
No Free Lunch
@Anonymous: …”to achieve at specific exchange range WRT the US$”… CAD.USD wants what it wants. Bank of Japan tries all the time to move their rate with the printed QE12 money (or whatever they’re up to now). Look at the the USD YEN and USD EUR cross and see how out of control they are. Unless you’re China, with buttoned down domestic situation, central banks know it is hopeless to try pegging rates in a range. It’s all about what domestic statistics say. If you have a perfect model of how the exchange rate changes each central bank’s domestic CPI, employment, etc you might be able to make money. FYI: Every central bank except China has an overnight cash rate announcement schedule. Trade the price action the day before and during these announcements – you will make money. The Bernanke… Read more »
yvr2zrh
Member

@Anonymous:

My current thought is that they are not so concerned about the exchange rate. We have been in quite a tight range for a while and the economy over time has been adapting. There is some need for the CAD to weaken against the largest trading partner to make our oil exports generate more cash and make the manufacturing sector more competitive (and put less downward pressure on Canadian wages).

So to answer your question, I don’t think they will react in such a way.

Anonymous
Guest
Anonymous

@Jesse/VHB/Patz/ZRH and anyone else with half a brain

If the BoC was making their rate decisions in an attempt to achieve at specific exchange range WRT the US$. What do you think that range would be (let’s say +/- $0.05)?

Ie. if the fed raises rates tomorrow, do you think the BoC waits for a $0.70 CAD before making their move?

HFHC
Guest
HFHC

Sorry I’m late to the party

New Listings 312
Back On Market Listings 9
Price Changes 193
Sold Listings 108

ALL LOWER MAINLAND

No Free Lunch
Guest
No Free Lunch
@patriotz: “…trying to sell my Facebook shares since last May, but no takers. Just bad luck I guess.” People actually get your joke on this board! I waited to comment as I was very curious to know how many negatives you would get. Your remark is very funny indeed! Shorting FB was surprisingly profitable to my trading account. It can only be described as a mercy killing really. Please excuse my dark humor. Consider the analogy in the recent parody clip of the TV show “Breaking Bad” below: http://www.youtube.com/watch?v=Hdo5BwQn2yM Imagine Walt and Jesse are the basic market force factors like plausibility of business plan, comparable price to earnings performance, and so on. Then imagine a clueless hoody wearing Mark Zuckerberg smiling and waving from the boat while saying “social media, yay!”… Then, his facial expression changes. Blam! LOL! I couldn’t… Read more »
McLovin
Guest
McLovin

She couldn’t believe that prices in Vancouver haven’t come down as much as they have in the Okanagan. Now, it’s commonplace to bid on a house there that was previously $500k, now selling for half that, or at least 30% off.

Sadly this is not true. Prices have come down a lot in the Okanagan but no where near 50%. Most places are down 10-20%. I am sure prices will continue to drop for years to come but there are not there yet.

MM
Guest
MM

@Devore: “Many realize they could not afford to buy today the house they live in.”

This is actually quite a chilling realization, once the initial smugness wears off… not sure everybody is ready for that

pricedoutfornow
Guest
pricedoutfornow
@pricedoutfornow: Oops, didn’t finish. Anyway, I was trying to explain to her how we were considering renting a townhouse for $2000/month, which would cost nearly $4000 to buy, with 10% down. Being in the Okanagan, she couldn’t really get what I was saying-she thought I was saying the rent would be $4000 but the mortgage would be only $2000. She couldn’t believe that prices in Vancouver haven’t come down as much as they have in the Okanagan. Now, it’s commonplace to bid on a house there that was previously $500k, now selling for half that, or at least 30% off. I guess she doesn’t watch the news and has no idea that houses in Vancouver are about a million dollars. She keeps telling me to buy, buy, buy-since the Okanagan prices have dropped so much it almost makes sense. What… Read more »
pricedoutfornow
Guest
pricedoutfornow

Had a nice chat with a friend from the Okanagan today. She put an offer in on a CMHC-owned house last week, didn’t get it due to not being able to get the morgage.

jesse
Member

@Anonymous: “Interest rates in Canada will be dictated by the US interest rates.”

This graph indicates that Canadian overnight rates are not always in lock-step with the US. Spreads of up to 200bps on the overnight have occurred as recently as 10 years ago.

ScubaSteve
Member
ScubaSteve
crashcow
Member

Going to be fun watching this kind of rear-view mirror analysis as RE deflates:

Ian Watt: Jul 9, 2012
“Maybe we’re gonna see a 5% correction [but] I don’t think we’re gonna see a 10% correction in Vancouver”

Ian Watt: Sep 24, 2012
“Vancouver may have been 10% overpriced”

painted turtle
Guest
painted turtle

Why I visit this blog?

Because it educated me in the past 5 years, like no other website. I learned out to run the numbers before making the biggest financial decision of my life.

I would not buy if prices fall 50%, because that would bring the price of my rental to $750 000. Too much, too risky, no benefit.
Considering my rent, I would break even at 600K, i.e. it only makes sense to buy if prices fall at least 60%!

Juliette Johnson
Guest
Juliette Johnson

@Romeo Jordan: My god you’re tiresome!

Devore
Member
Devore

@No Free Lunch:

Nice. A rational person understands that unless you “close the trade”, eg: liquidate the inflated property and rent or buy a cheaper substitute, the riches are indeed only paper riches.

Many realize they could not afford to buy today the house they live in. That’s gotta make you stop and think, unless you’re just completely oblivious.

Anonymous
Guest
Anonymous

@jesse: “It’s also reasonable to ask how long it’s possible to keep real rates negative. Those on fixed incomes who are loath to increase their savings’ burn rate or take on more risk are eventually going to start writing letters to their MPs.”

Interest rates in Canada will be dictated by the US interest rates. At some point the US will raise rates because the economy has improved or because investors will no longer buy their bonds at these low rates due the amount of debt the US will be in after a few more years the what we have seen since 2008. Interest rates going up in the US is inevitable in the next few years which means rates will go up in Canada but not because the grannys are writing their MPs.

Romeo Jordan
Guest
Romeo Jordan

Looks like 20,000 will have to wait for October.

That said, pretty good listings growth for the month.

Sales sucked, suckas!

I sent Chimpman a bag of rusty nails to stick up his arse, his bullshit about listings having peaked, what a crock of shit.

THIS IS THE BIG ONE.

midnite toker
Member
midnite toker

@zonk: 2 things – most of my tfsa is held in stocks, so I’d need to sell them to free up cash if needed … much easier to borrow at 2 or 3% for nine months. Sure it would be nice to have more cash but what can you do. Not having a huge mortgage makes it easier to sleep at night.

Anonymous
Guest
Anonymous

@Romeo Jordan: Yeah, and it would trigger a buying frenzy, with houses being so cheap! And we’ll have a repeat of 2009.