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Victoria Real Estate Board June 2010 Data

Canadian Debt Serfs

Despite Canada’s official continued rosy outlook on the economy and the country’s position globally, cracks are showing. For example, the Victoria (BC) Real Estate Board is preparing to release it’s June sales vs listing data, which isn’t looking so good. House Hunt Victoria has parsed the information and created some simple graphs that tell quite the story of eight years of June data. (The full sized graphs are available by clicking the image or the link above).

Some Background

This is one of many articles that I regularly see indicating a Canadian Housing Bubble. In another, David Descôteaux, a writer for Metro Canada recently wrote “One broken refrigerator away from default“, referring not to homeowners in America, but in Montreal:

We’re all Americans now.

Marc is in charge of mortgages at a large bank, and he’s getting nervous.

“Many cases are scaring me. One customer owes $60,000 in credit card debt, and he wants to refinance his mortgage to repay it.”

Eric Lam at the Financial Post wrote today,

With Canada’s economy stumbling in April, adding fuel to speculation the country’s roaring recovery that began in September 2009 was coming to an abrupt end, economists warned Canada’s central bank will have to tread carefully on its plan to raise interest rates for the rest of the year.

Derek Holt and Gorica Djeric, economists with Scotia Capital, said the Bank of Canada “was not likely to be swayed” by Wednesday’s economic data. “There should be enough strength in the underlying economic momentum to dismiss the drag on GDP in April as something that does not portend the start of a new trend.”

Read more: Financial Post
and CTV’s coverage of this issue from late June2010:

Household debt also rose, particularly mortgages, Statistics Canada said. The ratio of household credit market debt-to-income now stands at 147 per cent, up from 144.9 per cent in the fourth quarter of 2009.

Basic creditcard / debitcard / smartcard graph...
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Separately today, the Bank of Canada cited as “an important source of risk” the proportion of households deemed vulenrable to wealth and income shocks, a level it said in a semi-annual review has increased in recent years. “In the event of a significant economic downturn, the credit quality of household loan portfolios could be undermined, prompting banks to tighten credit conditions and some households to reduce spending,” the central bank said. “Ultimately, this could result in mutually reinforcing declines in real economic activity and in the health of the financial sector.”

What Does this Mean for Average Canadians?

I’m not a financial adviser, but personally, I look at these situations with caution. When people who want to sell can’t, personal debt rates are high, and despite all government attempts at intervention, the economy appears to be grinding along slowly, (at least for a few more months), this adds up to an unsustainable situation.

A few months ago, I heard about US banks moralizing over people walking away from houses that were underwater, (i.e those properties that were worth less than was owned on them). Apparently in Canada walking away is not an option. You pay the bank or you declare bankruptcy.

If housing prices in the major centres are about to pop – there could be large number of owners underwater. If this was your situation and you didn’t consider yourself a debt serf before, at that point it would appear that you would be one.

The term “austerity” has been thrown around in response to some of the European financial situations, Ireland is one of the best examples of what these spending cuts truly amount to:

As Europe’s major economies focus on belt-tightening, they are following the path of Ireland. But the once thriving nation is struggling, with no sign of a rapid turnaround in sight.

Nearly two years ago, an economic collapse forced Ireland to cut public spending and raise taxes, the type of austerity measures that financial markets are now pressing on most advanced industrial nations.

“When our public finance situation blew wide open, the dominant consideration was ensuring that there was international investor confidence in Ireland so we could continue to borrow,” said Alan Barrett, chief economist at the Economic and Social Research Institute of Ireland. “A lot of the argument was, ‘Let’s get this over with quickly.’ ”

Source: NYT – In Ireland, a Picture of the High Cost of Austerity

It didn’t work out as planned and signs show that things are about to get worse for Ireland as well as for other European countries as they struggle to make debt payments.

But for the people on the streets in Ireland, the average people, things are pretty bleak (again from the NYT article:

David Stronge returned to Dublin in 2006 from an architecture job in Britain. “I wanted to come back here and get a piece of this action,” he said. “And I did for about a year. But then it started to tank.”

He moved to reinvent himself, returning to school with thousands of other Irish, in hopes that a higher degree would lead to better prospects. Mr. Stronge plans to seek alternative energy jobs in Britain once he gets his master’s degree in August.

“Ireland isn’t going to spend on infrastructure probably for another 10 to 15 years,” he said. “So you have to go to where the opportunities are.”

At the D Café, a sandwich shop facing a stretch of empty buildings in Dublin’s Docklands enclave, even that dream seems impossible. “If you’re self-employed and lose your job, you’re entitled to nothing, not even the dole,” said Debbie, the owner, who would only give her first name.

She transformed her convenience store into a deli when Liam Carroll, a property baron, threw up the nearby developments. But the tenants never came, and her business evaporated.

“It’s so destroying,” she said, gazing out the window. “We all live day by day, and we don’t know when it will ever pick up.”

Some Questions to ask the Government

  1. Does Canada have enough money to run another Infrastructure Stimulus if things don’t pick up?
  2. Has the Government investigated the impact of interest rate rises on home loan default rates? How much give is there in the system?
  3. What would the government do to avoid widespread bankruptcy claims? Or is this in the best interests of the country as a whole?

The economic situation has taken our collective eyes off the ball of several other important issues – climate change, the food crisis, water use and pollution, and peak oil. And while it is important that we come together through the other side of this crisis, some of the other issues are much more local in nature and unable to be adequately addressed at the global or national level. We may never again see the levels of national stability we enjoyed through the last 50 years. As a nation, it is likely we are going to need to toughen up, austerity seems a long way off right now, but it may only take a tipping point of one indicator that the government can’t control and we’ll be running on empty.

Are you comfortable with your debt level?

Big Fat Disclaimer: I am NOT a financial adviser. Nothing on this site should be construed as investment advice or guidance. It is not intended as investment advice or guidance, nor is it offered as such. It is solely the opinion of the writer, who is NOT an investment counselor/professional. All the content of this website is solely an expression of his personal interests and is posted as free-of-charge opinion and commentary. If you seek investment advice, consult a registered, qualified investment counselor (As with any other professional service, confirm their track record and referrals).

Mike Thomas

Mike Thomas P.Eng. ENV SP, is the author of UrbanWorkbench.com and Director of Engineering at the City of Revelstoke in the Interior of British Columbia, Canada. If I post something here that you find helpful as you navigate the world of engineering, planning and building communities, that’s wonderful. But when push comes to shove: This is my personal blog. The views expressed on these pages are mine alone and not those of my employer.

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