What a fantastic game over the weekend 🙂 Our household debt to personal disposable income in Canada is around 163% today. In the U.S. the ratio is only 140%. This ratio is greatly affected by the price of homes. The Canadian housing market has done well since the last recession, but home prices in the U.S. have fallen. So Canadian indebtedness has continued to grow while U.S. households have deleveraged which has lowered their debt to income ratio.
So why do home prices continue to climb up here? I believe there are many reasons but by far the main contributor is the monetary policy of keeping interest rates low for so long. Interest rates have been overall falling for the past 3 decades. When interest rates are lower borrowers can afford to borrow more, which they often do 🙂 And banks are willing to lend more because they only consider ratios, incomes, and whether or not the borrower can afford the minimum payments.
So with such a high debt to income ratio (163%) are we in a lot of financial risk like the U.S. was back in 2007 when their ratio was also 163% at the time? I recently read a study by an economist on TD Bank’s website (It’s in PDF format) that looks at the differences between Canadian and U.S. debt-to-income ratios and explores why they should NOT be directly compared.
The study suggests the methodologies used to calculate the ratios are different in Canada and the U.S. For example we have different ways to fund health care and tax personal incomes that should be factored into the disposable income amount. But after adjusting for various methodological differences, the Canadian indebtedness ratio in 2013 is lowered to just 156%. And instead of 140%, the U.S. ratio increases to 152%. So we’re not all that different after all 🙂
Mortgage rates have not gone up in Canada for quite some time now. But Canadian wages HAVE been increasing every year since the recession. What happens when our incomes rise, but our mortgage payments stay the same? Yup, it becomes relatively easier to service that mortgage 🙂 The interest costs we pay to own a home relative to our incomes have never been more affordable in my life 😯
So do Canadians have too much debt? Not in my opinion 🙂 According to the adjusted numbers in the study, U.S. household debt to income ratio was at 177% in 2007 before it triggered the recession. That means Canadian households can still borrow more before reaching the same danger zone. There’s no reason to panic yet guys 😎 Borrow away!
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Random Useless Fact: Samsung doesn’t just make electronics. The conglomerate is also a full time weapons manufacturer. Samsung’s makes over $200 billion USD/year in revenue. Yowza! That’s more than what Amazon, Google, Microsoft make combined.
Fascinating read! I’m not Canadian, but it was very interesting to see the comparison between Canadian and US debts. (And that little snippet about Samsung – who would’ve thought! I learn something everyday!)
The media outlets are often quick to point out how consumers are too indebted, and how our homes are too expensive. But as usual it’s up to individuals to make sense of it all 🙂
Hmm, you mention mortgage rates, but not total mortgage costs? Housing prices have continued to increase, no?
That bit about Samsung is fascinating, I had no idea they were that large nor that they play in weapons manufacturing.
Interesting point. I didn’t count for that. The banks use the total mortgage costs to calculate how much a home buyer can potentially borrow, so it would make sense that if home prices increase and interest rates stay the same, then the total mortgage cost would still become higher 🙂 It appears they only accounted for the interest expenses in the chart above. Perhaps the economist thought the remaining part of the total mortgage isn’t really an expense, but is more of a cash flow variable.
Yeah who knew Samsung was so ubiquitous. According to Wikipedia Samsung Group’s sales make up about 17% of South Korea’s $1.08 trillion GDP. And their affiliate companies produce 20% of the country’s total exports. Imagine the political, cultural, and economic influence Samsung’s executives have 😀 I can’t imagine if there was such a massive super power like that in Canada. By comparison the largest company by revenue here, Royal Bank, only makes up about 1.7% of our national GDP.
Interesting differences between the states and Canada. I always like reading posts from our neighbors to the north; I always learn new things 🙂
I like learning about the U.S. too. I might even consider moving down there some day.
I’ve got 2 houses paid for, so borrow and spend away my fellow Canadians, just ensure to pay your bills on time so not to scare the market gods. The banks have been on a tear this year and I guess we know why… I wonder how much one of them there K9 Thunders costs? I’d like one to park in my driveway. Intimidate the neighbors a little. Love those useless (not so useless) facts – Cheers.
If the banks have been on a tear at these suppressed rates, imagine how much their revenue from mortgage payments would be once Mr. Poloz starts tightening 🙂
I bet it would be really cool to work for a defense contractor or weapons manufacturer. You could be exposed to all kinds of military secrets, and play with new state-of-the-art technology before anyone else does.
Here in the states, it has gotten much more affordable since the market bust but I think prices are creeping up again. Really thats good news for me because we are looking to sell in the next 6 months so hurray!
Hope you will sell it at a good price 🙂 Happy Thanksgiving!