Canada's 'housing bubble' deemed close to bursting

[geotag277]

Originally Posted by someone123

For context, here are the relevant statistics on income: http://www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/famil105a-eng.htm

Only about 13 million Canadians earned more than $35,000 in 2015. And that is their income before taxes (around $30,000 after taxes in Ontario for that group).

Another problem with averages is that as you get into higher salary brackets, the debt load which is serviceable starts to become almost exponential.

To a person making 35K a year, 20k in debt might be devastating. To a person making 70k a year, 200k in debt might be no big deal. Once you reach 150k salary, you can easily afford 1MM debt depending on what it is, with current interest rates.

Debt servicing impact on income is lopsided towards the disposable income buffer, the picture can change dramatically across budgets, and it would be interesting to know if, for example, the richest 10% are servicing 90% of the debt.

[someone123]

Originally Posted by geotag277

A more sensible approach might be to average debt across working Canadians (about 18 million), then you get a relatively more scary 100k average debt.

And even in those 18 million, most are earning under $50,000 a year. $100,000 in debt represents in the ballpark of 2.5 years of net earnings for them, not counting interest.

Given the distribution of incomes in Canad I don't think there's any possibe interpretation of these numbers that looks good.

[someone123]

Originally Posted by geotag277

To a person making 35K a year, 20k in debt might be devastating. To a person making 70k a year, 200k in debt might be no big deal. Once you reach 150k salary, you can easily afford 1MM debt depending on what it is, with current interest rates.

What does "afford" mean? You can buy rice and beans plus make your loan payments, assuming your income never goes down? It's true that the rice and beans are a part of your base needs and don't scale with income, so a high percentage can go to debt as you earn more. But it's still not a great idea to borrow this much.

All of that aside it's clear that much of Canada's consumer spending has been fueled by borrowing. But we are reaching a point when many households will not be able to borrow more, and interest rates are going up.

[geotag277]

Well, just some back of the envelope calculations, a person making 150k in Alberta takes home 111133 a year, that's $9261 monthly. At current interest rates, the servicing costs on 1MM would be about $4,732.45 monthly.

That still leaves this individual with 4528.55 a month in living costs.

That is a dramatically different disposable income picture than someone who makes 35k a year, who is taking home about 33k after taxes, and has in some total 2811 a month to distribute to all cost of living concerns. This person cannot afford hardly any debt, as their income will be gobbled up by food, shelter, and other costs.

Disposable income is a debt servicing multiplier, increasing the freedom and piece of mind of borrowing.

[someone123]

Originally Posted by geotag277

Well, just some back of the envelope calculations, a person making 150k in Alberta takes home 111133 a year, that's $9261 monthly. At current interest rates, the servicing costs on 1MM would be about $4,732.45 monthly.

That still leaves this individual with 4528.55 a month in living costs.

Yep. So the $150,000 earner (top ~2% in Canada) with $1M in debt spends (or saves) like someone who earns $70,000 a year.

And if interest rates go up they get to have a $60,000 a year living standard.

The real question is whether they borrowed for something productive or useful. A lot of Canadians have been using HELOCs for day to day living expenses and have not been paying down the principal, or even paying the interest.

[whatnext]

Originally Posted by geotag277

Another problem with averages is that as you get into higher salary brackets, the debt load which is serviceable starts to become almost exponential.

To a person making 35K a year, 20k in debt might be devastating. To a person making 70k a year, 200k in debt might be no big deal. Once you reach 150k salary, you can easily afford 1MM debt depending on what it is, with current interest rates.

Debt servicing impact on income is lopsided towards the disposable income buffer, the picture can change dramatically across budgets, and it would be interesting to know if, for example, the richest 10% are servicing 90% of the debt.

And yet we have posters who set their hair on fire over the Government of Canada running a deficit. Go figure.

[geotag277]

Originally Posted by someone123

Yep. So the $150,000 earner (top ~2% in Canada) with $1M in debt spends (or saves) like someone who earns $70,000 a year.

And if interest rates go up they get to have a $60,000 a year living standard.

The real question is whether they borrowed for something productive or useful. A lot of Canadians have been using HELOCs for day to day living expenses and have not been paying down the principal, or even paying the interest.

IT's most like once you have 4000 or so a month in after tax income, you can have a very high standard of living in Canada. I don't think there is an appreciable difference in the quality of life of someone at 60k or 70k or 90k - any excess spent each month is probably wasted, and at the very least could be put to use financing debt towards appreciating assets, and growing one's wealth. Someone making 35k a year doesn't have the same ability to grow their wealth and by comparison has almost no disposable income to service debt.

The concept of a 60k a year living standard and a 70k a year living standard seems absurd - after the 3-4k baseline for basic needs + extra entertainment, having a few extra thousand a month does not appreciably demarcate lifestyles into "60k" and "70k" brackets.

[someone123]

I'm not sure what the ultimate point of all this is. I sort of agree with some of what you say and disagree with other parts.

If you are arguing that something special happens in terms of debt servicing for higher income individuals such that $50,000 per capita debt is of little consequence in Canada, I disagree. There aren't that many high income earners so this effect can't be that strong even if it exists. Lots of Canadians have high personal debt loads and struggle to repay their debt.

As far as living standards, there was a popular study a while back about how income beyond something like $70,000 a year didn't increase happiness much. Okay. But there's a big difference between having to work and then fork it over versus having a guaranteed income for life. The $1M debt scenario is actually pretty insecure. People in that kind of scenario are often stuck on a treadmill of work and debt repayment.

People think they will borrow and generate long-term wealth but again they are rolling the dice and the average returns are not great. If you time your risky real estate investment right with respect to bubbles, sure, you might do well. But in the long run returns will regress to the mean and are not likely to be much higher than the interest paid on debt. This is completely unremarkable. "Everyone's a millionaire" type schemes are never going to work in the long run because they are bound by economic productivity.

Beyond that I'd say that if you can't find fun ways to spend more than $3,000-4,000 a month you should get more creative!

[lio45]

Originally Posted by whatnext

And yet we have posters who set their hair on fire over the Government of Canada running a deficit. Go figure.

Wow, you sure aren't familiar with real estate... where you nearly always have something solid enough to show for your debt; government deficits, on the other hand, are generally more similar to throwing money into a black hole.

Debt isn't a problem if you have assets. Government borrowing, on the other hand, gets spent. It's completely different.

A better analogy would be an adult couple borrowing a million and wasting it on random stuff while their toddlers are legally bound to become guarantors of that debt until it's paid off, regardless of how long it takes.

Now, yes, sometimes government debt can be actual good leveraged investing, say, borrowing a billion in order to build a new dam with the goal of selling the electricity to New England while getting a nice ROI even after debt servicing costs. But that's much closer to the exception than the rule.

[rbt]

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[someone123]

Originally Posted by lio45

Now, yes, sometimes government debt can be actual good leveraged investing, say, borrowing a billion in order to build a new dam with the goal of selling the electricity to New England while getting a nice ROI even after debt servicing costs. But that's much closer to the exception than the rule.

It is not really that exceptional. It's actually really common to see news articles where people complain that governments didn't really run a surplus because they added to the debt through capital spending while approximately breaking even on operations.

I think, in general, Canadian governments simultaneously waste money and spend too little on productive areas like infrastructure investment in growing cities. They are also too hesitant to borrow to finance useful projects (though admittedly it's hard to channel money into only useful projects).

Another difference people often fail to account for between personal finance and public finance in a country like Canada is that Canada controls its currency and interest rates, and can manipulate what it means to owe debt in Canadian dollars. Households are not like this.

And yet another factor for both kinds of finance is that asset prices aren't fixed. If you buy a house for $1M and owe $1M your net worth at the time changes by $, but its variance has gone up a lot. Right now asset prices are really bloated because so many people are borrowing money to buy them. As lending slows down I think they will drop.

[cabotp]

One thing to keep in mind is that not all debt is equal. Lets assume two people are in debt for $100,000 and both make the same income. Person 1 has debt structure of $80,000 mortage + $20,000 student loan. Person 2 has a debt structure of $40,000 mortage + $40,000 credit cards + $20,000 student load. Person 1 is actually in better shape, because more of their debt is financed towards something that will give them a long term benefit and should give them a reasonable rate of return.

The problem in the last few years as the cost of shelter (mortage or rent) has increased. More people are having to use their credit card to pay for non discretionary items (food, clothing, etc..) This is causing more people to look more like person 2 than person 1.

On another note a person making $90K per year probably doesn't have that much a different lifestyle than someone making $70K per year. However where the difference can come into play is that the person make $90K will more than likely pay of their mortage faster and this then leaves them with more money to save for retirement or allows them to retire early. This of course is assuming the person making $90K is blowing the excess on unnecasary items.

[khabibulin]

Originally Posted by whatnext

And yet we have posters who set their hair on fire over the Government of Canada running a deficit. Go figure.

I guess you don't remember 1995.

[MolsonExport]

Healthcare eats up a larger and larger share of our government spending (mostly at the provincial level, but partly through transfers from the federal government). The overwhelming bulk of medical costs for the average person are incurred during their last decade. As the population is aging and the number of seniors are multiplying exponentially, we can expect to see a concomitant exponential increase on costs dedicated to healthcare.

What I find ironic is that seniors are the group most apt to vote conservative, who in turn are the ones to clamor for cutting expenses.

We as a nation are lagging in terms of investing in our youth (education, science, R&D) and infrastructure. These investments pay dividends for decades, whereas spending hundreds of thousands of dollars on people in their twilight years does not.

Slug Ford is not the answer.

[kwoldtimer]

Originally Posted by MolsonExport

Healthcare eats up a larger and larger share of our government spending (mostly at the provincial level, but partly through transfers from the federal government). The overwhelming bulk of medical costs for the average person are incurred during their last decade. As the population is aging and the number of seniors are multiplying exponentially, we can expect to see a concomitant exponential increase on costs dedicated to healthcare.

What I find ironic is that seniors are the group most apt to vote conservative, who in turn are the ones to clamor for cutting expenses.

We as a nation are lagging in terms of investing in our youth (education, science, R&D) and infrastructure. These investments pay dividends for decades, whereas spending hundreds of thousands of dollars on people in their twilight years does not.

Slug Ford is not the answer.

Yesterday's news had a bit from the Ontario FAO on this. And we are just at the beginning of what is to come over the next twenty or thirty years.

http://www.cbc.ca/news/canada/toronto/ontario-health-spending-1.4575909

[osmo]

Very rare to see the discussion pivot towards the core reason for housing pricing issues in Canada which is the currently cheap debt which Canadian have been binging on to inflate tight housing markets. What report was it a while back that stress test that majority of Canadians could not stomach a full point increase in interest rates as most are so over-leveraged a $200 increase in payments would sink them? With meagre salaries, most Canadians are running on fumes as it is and this has been the significant problem for many housing markets coupled with tight supply. Hard to point the finger and random Chinese folk when the issue of stretched pocketbooks is a national problem at the moment.

[Pinion]

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[whatnext]

Originally Posted by Pinion

Another "technically not foreign" multi-millionaire deported. Now just do this about 100,000 more times and housing prices may get back in line with the economy:

http://www.nsnews.com/news/west-vancouver-woman-loses-immigration-appeal-1.23204401

If the federal Liberals want to save their bacon in BC in 2019, they're going to have to do a lot more of this, and publicize it. Ditto with whatever tax action they're taking on speculators, money laundering and other tax evaders.

[someone123]

Originally Posted by osmo

Very rare to see the discussion pivot towards the core reason for housing pricing issues in Canada which is the currently cheap debt which Canadian have been binging on to inflate tight housing markets. What report was it a while back that stress test that majority of Canadians could not stomach a full point increase in interest rates as most are so over-leveraged a $200 increase in payments would sink them? With meagre salaries, most Canadians are running on fumes as it is and this has been the significant problem for many housing markets coupled with tight supply. Hard to point the finger and random Chinese folk when the issue of stretched pocketbooks is a national problem at the moment.

How does the fact that Canadians borrow a lot of money invalidate concerns over foreign buyers?

The two phenomena are related. In a market with more rich foreign buyers, locals need to borrow more and more money to compete against the foreign buyers and against the other locals who cashed out of higher-end homes. This is exactly what has happened in the Lower Mainland.

The full story is that there are many different problems with the housing market in Vancouver, and most of them need to be fixed to bring housing prices down to affordable levels.

[someone123]

Originally Posted by whatnext

If the federal Liberals want to save their bacon in BC in 2019, they're going to have to do a lot more of this, and publicize it. Ditto with whatever tax action they're taking on speculators, money laundering and other tax evaders.

It feels like there is a disconnect between the rosy way the federal Liberals portray immigration in Canada and the reality on the ground.

For example a while back there were the stories about Bill Morneau's advisors suggesting that Canada should aim for a population of 100 million by 2100 and how great this would be for economic growth. This doesn't sound good when at our current levels of immigration two of the biggest cities have already seen huge drops in their standard of living as indicated by housing affordability and commute times. If we can't handle 300,000 a year without hugely eroded affordability how can we handle 450,000 a year?

Federal politicians like Morneau and Trudeau live in a privileged world and are completely insulated from the downsides of immigration that they rarely if ever acknowledge. But voters mostly have to deal with these consequences (including recent immigrants themselves).

On top of this there is the naivety of the "a Canadian is a Canadian is a Canadian" attitude when we live in a world full of people like Xiao Qing Li. The fact is that there are millions of potential bad actors out there and they will be attracted to Canada if our immigration and tax systems have loopholes. Have any federal Liberals even admitted the widespread fraud and money laundering that exists in Canada, let alone the fact that we don't tax wealthy newcomers enough even when everything is above board?