Canadian Household Debt Is Rising Faster Than Income At A Record Rate
Canadian household indicators are showing their debt problems are rapidly resurfacing. Statistics Canada (Stat Can) data shows the ratio of household debt to disposable income surged in Q2 2021. This measure indicates debt is growing faster than the rate of income. Debt as a ratio of income has actually never seen such fast annual growth in Canada.
Canadian Households Have $1.73 In Debt For Every Dollar They Make
Canadian households are borrowing much faster than their incomes are growing. Household credit market debt to disposable income reached 173.08% in Q2 2021. That’s up 0.30% percent from the previous quarter, and a massive 8.61% larger than the same quarter last year. More bluntly put, Canadians on average had $1.59 in debt for every dollar they made last year. Now they have $1.73 in debt for every dollar they made last quarter.
Canadian Household Debt To Income
The ratio of Canadian household market credit to disposable income.
Households See The Ratio Of Debt To Income Rise At A Record Rate
The jump from last year sounds big, but it needs to be seen in context to truly appreciate how large it is. The 8.61% annual increase is the largest seen going back to at least the 90s, but likely much further. It’s unusual for central banks to stimulate credit to this extent while households are borrowing.
Canadian Household Debt To Income Change
The annual percent change in the ratio of Canadian household market credit to disposable income.
Canada’s Boost To Household Income Was Transitory
The boosted credit growth is only partially due to credit outpacing disposable income. The other (larger) contributor is the pandemic’s distortion of disposable income readings. Government transfers at the start of the pandemic were much larger than the income lost at the time. It initially averaged two dollars of income support, for every dollar of income lost.
The temporarily boosted disposable income pushed the credit to debt ratio lower. In Q2 2020, the ratio fell to the lowest since 2009, losing 12.7% from the previous quarter. It would be amazing to see that kind of movement, but alas — that was simply a data skew. People were paying off more debt, but not to the extent the indicator might have implied to some.
There is a lot of focus on how costs have been skewed by temporary base effects, but not a lot on income. However, there was absolutely a temporary boost to disposable income. Support is now tapering, and debt indicators are rising close to pre-pandemic data. Experts currently see the most generous of supports completely gone by November. At that point, we’ll get a clearer picture of household finances, without the data skews.
Canadian Real Estate Is Now A Bubble On Top Of A Bubble: US Federal Reserve
Either the Canadian real estate bubble is now a bubble on a bubble, or old enough it should be in school. The US Federal Reserve (the Fed) released its quarterly exuberance index for Q1 2021. The index, used to determine country-level housing bubbles, shows Canada is well into one. The unusual circumstances make it unclear if it’s a long bubble, or a double bubble. It does show Canadian home prices have been in bubble territory for 6 years without a correction.
Home Price Exuberance And Emotional Home Buyers
The Exuberance Index is a measure of buyer enthusiasm for higher prices. It measures the prices paid in contrast with fundamentals, looking for explosive dynamics. That’s how smart people say, buyers paying irrational amounts of money. Emotional premiums like this are not based on fundamentals. Consequently, the price of these homes is subject to how people feel. Emotions change faster than fundamentals, leaving markets more vulnerable to shock.
The Fed developed the indicator after the US Housing Bubble popped, and wreaked havoc. By looking for a “smoking gun” indicator to call bubbles, they can identify and address them early. This limits the damage that they might do to the economy.
They crunch the numbers, and make it straightforward for researchers to read. Two sets of numbers are given — a critical threshold value, and an exuberance index score. If the score rises above 95% of the critical threshold value, buyers are acting exuberantly. If the market stays in this territory for five or more consecutive quarters, the market is exuberant.
Exuberant markets are better known as bubbles. The Fed argues this will result in a correction at some point, but they obviously can’t pin down when. Policy and credit extensions are often designed to drag out a bubble. This can run for as long as the government can continue to create a larger bubble.
It’s generally not advised though, since bigger bubbles create more dangerous corrections. Extending them too long inevitably slows down the economy, causing its own event. If you think losing home equity is bad, imagine how bad things get when the economy is dependent on the bubble. On that note, let’s see where Canada is.
Canadian Real Estate Prices Are Based On Emotion, Not Reality
Canada just passed another fifth quarter of exuberance, after a microscopic break. Canadian housing once again became exuberant in Q1 2020. In Q4 2019, it took a brief break below the critical threshold value — just 0.01 points below it. Since then, the market has completed five consecutive quarters in the exuberant territory.
Canadian Real Estate Exuberance Index
The US Federal Reserve Exuberance Index for Canada, and critical value threshold. A market that is is above the threshold for 5 consecutive quarters is considered to be exuberant.
The Fed’s exuberance reading for Canada hasn’t been this high since 2017. Back then, it was due to Toronto and Vancouver, and the infamous foreign buyer mini-bubble. This time the whole darn country is actually showing signs of exuberance. Though it’s important to recognize, the current trend follows 15 quarters of exuberance. One quarter isn’t enough to have corrected prices, and it only fell slightly below that value.
Canadian Real Estate Has Been In A 6 Year Bubble…
Or It’s A Bubble On A Bubble
There are two ways to look at this, and it’s just a technical labeling issue. Falling just 0.01 points below the threshold is likely within a margin of error. A single quarter isn’t enough for a new trend either. Remember, it takes five quarters for the market to be considered exuberant in the first place. In this case, the bubble would now be 24 quarters old, or about 6 years. Happy 6th birthday, Canadian Real Estate Bubble!
If you accept the break as definitive proof the first bubble was over in 2019, it’s two bubbles. Canada had a 19 quarter-long bubble, which ended in Q4 2019. It was then followed by the current bubble, which started one quarter later. In other words, it’s a bubble on a bubble.
Ultimately a label doesn’t change all that much. The facts are, buyers showed exuberance in 2015. Early signs weren’t tamed in 2016, which would have been the ideal time to address it. So it turned into a full-blown bubble. Since then there’s been no correction in home prices for the past six years.
Policymakers can either let it correct, or delay the correction until later, and hope it’s the next guy’s problem. By doing this, they’re actively creating more risks for Canada’s economy. No one knows when the bubble is going to pop, but we do know one thing for sure. When it happens, whoever’s in charge will say, “no one saw this coming.”
Federal Reserve researchers will try not to snicker, I’m sure.
Canada’s Economy Hits A New Record For Dependency On Real Estate Investment
The Canadian economy defied odds, and became more dependent on real estate investment. Statistics Canada (Stat Can) residential investment data shows a surge in current dollars for Q2 2021. The most recent quarter showed a massive climb — much bigger than GDP in general. This pushed residential investment’s share of the economy to a new record high.
Residential Investment
Residential investment is the segment of gross domestic product (GDP) related to housing. It includes the construction of homes, significant renovations, and ownership transfer costs. The measure isn’t comprehensive, since other areas like banking are dependent on housing. But it’s the most direct contribution housing investment makes to GDP.
Low growth in residential investment is typically seen during a recession. A lack of residential investment is a sign of consumers’ lacking confidence. Housing tends to involve borrowing for most people. People tend to borrow less if they’re worried about job stability. This is typical of a recessionary environment.
High growth can be a sign of a large misallocation of capital — both financial and human. This tends to happen when money is cheap, and has too few places to land. The US at its peak bubble saw the share of residential investment rise to almost 7% of GDP. An overallocation can amplify an economic shock, which tends to purge inefficiencies. This is essentially what happened to the US, during the Great Recession.
Canadian Residential Investment Jumped 25% Last Quarter
Canadian residential investment has been consuming more and more of the economy. Seasonally adjusted annual rate (SAAR) of investment hit $249.3 billion in Q2 2021. This is 0.59% higher than the previous quarter. It’s a new record in current dollars, by a significant margin.
Isolating just the most recent quarter of data, we see the SAAR trend minimizes the data. Unadjusted residential investment for the second quarter was $67.9 billion. This is up 25% from the previous quarter, and a record high. The seasonal adjustment is flattening the quarterly trend significantly.
Housing Investment Represents A Record Share Of Canada’s GDP
Residential investment’s share of the economy is falling, according to the SAAR trend. It represented 10.1% of gross domestic product (GDP) in Q2 2021, down from 10.3% in the previous quarter. The previous quarter is the record share, so the indicator is just a little below that.
Canadian Residential Investment As A Share Of GDP
Canadian residential investment expressed as a share of gross domestic product (GDP).
Unadjusted quarterly investment actually shows it was a record share of the economy. Residential investment reached 11.2% of GDP in Q2 2021, up from 9.5% the previous quarter. This is contrary to the SAAR trend, which shows slowing growth. In the most recent quarter, it might actually be the exact opposite of what people have been saying. Canada became even more dependent, without smoothing the trend.
Seasonally adjusted data for residential investment shows it’s slowing. This is especially true when compared to the general economy, when seasonally adjusted. Unadjusted quarterly data shows residential investment is actually accelerating though. It might be a seasonal blip, but seasons have meant less and less for housing throughout the pandemic.
Housing prices in this Ontario city are absolutely booming
Sean Davidson
Published Friday, September 10, 2021
Housing prices surging in this Ontario city
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People selling homes in one Ontario city are scoring big as housing prices surge.
TORONTO -- People selling homes in one Ontario city are scoring big as housing prices surge to record levels.
The median price for a home in Brantford, located about 110 kilometres south-west of Toronto, has skyrocketed more than 40 per cent over past year, figures show.
In July 2021, the median price for a Brantford home was $777,026.
The average price of a detached home in Toronto is currently about $1.7 million, meaning that in Brantford, you could save one million dollars.
One real estate expert thinks COVID-19 is playing a bit part in the booming market.
"I think people took a moment to reflect and see what was important to them," Remax Broker Judy Lillico, who has worked in the area for 21 years, told CTV News Toronto.
"Sitting in a 600-square-foot condo was not as appealing as getting a two-storey three-bedroom detached home with a yard at a much better price point."
While the Brantford housing prices may seem like a steal to Toronto buyers, Mayor Kevin Davis said there is a big downside to these escalating prices.
"If you're young family trying to get into the housing market, it becomes difficult for looking families to buy a home in their own city," Davis said.
Lillico believes some out-of-town buyers may have second thoughts down the road.
"My guess is some people are going to choose to go back when COVID is over and some will decide this is the life for them," Lillico said..
For people who are eventually forced back into the office, living in Brantford will make for a long daily commute to Toronto.
With files from CTV News Toronto's John Musselman.
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