Here’s the Thing about Canadian Household Debt

By David Dittman • October 17, 2012 • Canadian Edge Weekly

Canada is dangerously exposed to a sharp decline in housing prices, should unemployment spike and Great White Northerners become unable to service their mortgages and car loans. That conclusion is readily clear based on recent Statistics Canada data, which reveals a citizenry enjoying the fruits of historically low interest rates but piling up what could be debilitating levels of debt if the US slides into recession.

StatsCan reported Oct. 15 that the ratio of household debt to disposable income hit 163.4 percent as of Jun. 30, 2012, up from 161.8 percent at the end of the January-to-March period. The first-quarter reading was enough to push Canadian Finance Minister Jim Flaherty to reduce the maximum amortization period to 25 years from 30 and lowered the top-side amount most homeowners can borrow against the value of their homes to 80 percent from 85 percent.

Stricter mortgage requirements, however, have not offset cravings for credit: During the second quarter Canadian household demand for credit-market debt rose 1.8 percent compared to the first quarter on rising appetites for mortgages and loans. These cravings are no doubt stoked by the Bank of Canada’s (BoC) low benchmark interest rate, which has been stuck at 1 percent since September 2010, the longest period since the 1950s it’s remained static.

The BoC has repeatedly warned that household debt is one of the most significant domestic risks to financial stability. But, as we’ve noted on more than one occasion, the central bank is in a tight spot. Since April the BoC’s bias has been in favor of a rate increase, as Governor Mark Carney has consistently noted that the economy is close to capacity, though inflation remains within the bank’s target range and appears to be adequately contained.

Pushing rates higher to stem debt-load growth would result in a wider rate policy rate differential with the US Federal Reserve. The Fed has committed to a low benchmark for the foreseeable future, with 0.25 percent likely to hold even after evidence of a durable economic recovery is crystal clear. A rate hike could put upward pressure on the Canadian dollar, and that would put additional pressure on Canadian exporters, as their goods would appear to be more expensive.

The information reported in StatsCan’s official publication, The Daily, include some positive data as well. At the end of 2011 per capita household net worth in Canada was CAD190,800. In the second quarter of 2012 national net worth increased by CAD77 billion, or 1.2 percent, to CAD6.8 trillion, up from CAD6.7 trillion in the first quarter. On a per capita basis national net worth expanded from CAD192,500 in the first quarter to CAD194,100 in the second quarter.

Canadians are particularly exposed to rising interest rates because of their rather high levels of debt. At this juncture, however, rising interest rates would probably signal a broader positive: a return to more normal growth. Rather, the biggest threat out there is a spike in job losses. In fact the correlation between unemployment and mortgage delinquencies is extremely high, while rising rates would likely result in debtors reallocating their resources.

StatsCan has other compelling news on this front: Employment north of the border increased for the second consecutive month in September, as Canada added 52,000 mainly full-time jobs. The unemployment ticked up to 7.4 percent from 7.3 percent, however, as 72,600 people joined the labor market. It was the third-biggest monthly jobs gain of the year, and it was more than five times the 10,000 jobs analysts expected to be created.

In August Canada added 34,000 jobs, but those were almost entirely of the part-time variety. On a year-over-year basis Canada has created 175,000 new jobs. According to StatsCan most of the new jobs were taken by workers in the core 25-to-54 age group. And most were taken by men, in the first notable increase in employment for that gender since March 2011. StatsCan noted that this increase brings employment for “core-aged men” back to its pre-recession peak.

The biggest gains were in the retail and wholesale trade sectors, where 34,000 jobs were created. The number of construction jobs–a weak spot in recent months–rose by 29,000. Employment in the information, culture and recreation industries saw increased by about 24,000, while about 8,700 new agriculture jobs were created.  “Other services” posted a loss of 19,000 jobs, while business, building and other support services shed 17,000.

Bank of Canada Senior Deputy Governor Tiff Macklem, in a speech before the Winnipeg Chamber of Commerce on Oct. 4, continued with the hawkish tone the BoC first adopted in its April 2012 interest rate policy statement.

“To the extent that the economic expansion continues and the excess supply in the economy is gradually absorbed,” said Mr. Macklem, “some modest withdrawal of the present considerable monetary policy stimulus may become appropriate, consistent with achieving the 2 percent inflation target over the medium term.” This language is basically identical to the language used in the BoC’s Sept. 5 rate announcement.

The BoC will make its next rate announcement on Oct. 23.

Mr. Macklen noted that employment had staged “a relatively quick recovery” and that “much of the slack in the labor market following the 2009 recession has been taken up.” But he also noted that “some slack remains.” Although a rate cut is unlikely in light of continuing slow growth in the US and the troubles plaguing Europe, neither is a rate increase on the immediate horizon.

According to the BoC growth has to exceed an annualized 2 percent for excess capacity to be absorbed. The central bank’s forecast for third-quarter growth is 2 percent; gross domestic product (GDP) expanded a revised 1.9 percent in the second quarter. Annual inflation in August was well below the BoC’s 2 percent target.

Canada’s most important business partner, still, even as officials of the Harper government talk up a future full of Asia-Pacific trade, is its southern neighbor, which happens to be, still, the biggest and most important economy on the planet. And the data flow from the US looks to be firming.

The US Dept of Commerce reported Wednesday that construction on new homes accelerated by 15 percent in September to an annual rate of 872,000, beating consensus estimates and marking the highest level of activity in more than four years. Building permits, a sign of future demand, also shot up to a four-year high, rising 11.6 percent to an annual rate of 894,000.

August housing starts were revised up to 758,000 from an original reading of 750,000, though August permits were revised down slightly to an 801,000 annual rate.

This is a good indicator for the US labor market; should this momentum persist homebuilders will begin hiring again in earnest, though there’s ample evidence that an employment recovery is well underway.

Earlier this week the Commerce Dept reported that US retail sales rose a seasonally adjusted 1.1 percent in September versus a consensus expectation for a 0.9 percent gain. Sales figures for August and July were also revised upward. August sales grew 1.2 percent, the fastest pace in nearly two years, versus a previously reported 0.9 percent. July sales were pushed up to 0.7 percent from 0.6 percent.

The Roundup

Here’s when Portfolio Holdings are expected to report their next set of quarterly numbers.

Conservative Holdings

  • AltaGas Ltd (TSX: ALA, OTC: ATGFF)–Oct. 26 (estimate)
  • Artis REIT (TSX: AX-U, OTC: ARESF)–Nov. 7 (confirmed)
  • Atlantic Power Corp (TSX: ATP, NYSE: AT)–Nov. 12 (estimate)
  • Bird Construction Inc (TSX: BDT, OTC: BIRDF)–Nov. 9 (estimate)
  • Brookfield Real Estate Services Inc (TSX: BRE, OTC: BREUF)–Oct. 30 (confirmed)
  • Brookfield Renewable Energy Partners LP (TSX: BEP-U, OTC: BRPFF)–Oct. 26 (estimate)
  • Canadian Apartment Properties REIT (TSX: CAR, OTC: CDPYF)–Nov. 11 (estimate)
  • Cineplex Inc (TSX: CGX, OTC: CPXGF)–Nov. 9 (estimate)
  • Davis + Henderson Income Corp (TSX: DH, OTC: DHIFF)–Nov. 8 (estimate)
  • Dundee REIT (TSX: D-U, OTC: DRETF)–Nov. 5 (confirmed)
  • EnerCare Inc (TSX: ECI, OTC: CSUWF)–Nov. 7 (estimate)
  • IBI Group Inc (TSX: IBG, OTC: IBIBF)–November 9 (estimate)
  • Innergex Renewable Energy Inc (TSX: INE, OTC: INGXF)–Nov. 9 (estimate)
  • Just Energy Group Inc (TSX: JE, NYSE: JE)–Nov. 8 (estimate)
  • Keyera Corp (TSX: KEY, OTC: KEYUF)–Nov. 1 (estimate)
  • Northern Property REIT (TSX: NPR, OTC: NPRUF)–Nov. 7 (confirmed)
  • Pembina Pipeline Corp (TSX: PPL, NYSE: PBA)–Nov. 9 (estimate)
  • RioCan REIT (TSX: REI, OTC: RIOCF)–Nov. 6 (confirmed)
  • Shaw Communications Inc (TSX: SJR/A. NYSE: SJR)–Oct. 26 (estimate)
  • Student Transportation Inc (TSX: STB, NSDQ: STB)–Nov. 9 (estimate)
  • TransForce Inc (TSX: TFI, OTC: TFIFF)–Oct. 24 (confirmed)

Aggressive Holdings

  • Acadian Timber Corp (TSX: ADN OTC: ACAZF)–Oct. 26 (estimate)
  • Ag Growth International Inc (TSX: AFN, OTC: AGGZF)–Nov. 14 (estimate)
  • ARC Resources Ltd (TSX: ARX, OTC: AETUF)–Nov. 2 (estimate)
  • Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF)–Nov. 9 (estimate)
  • Colabor Group Inc (TSX: GCL, OTC: COLFF)–Oct. 18 (estimate)
  • Crescent Point Energy Corp (TSX: CPG, OTC: CSCTF)–Nov. 9 (estimate)
  • Extendicare Inc (TSX: EXE, OTC: EXETF)–Nov. 14 (estimate)
  • Newalta Corp (TSX: NAL, OTC: NWLTF)–Nov. 1 (estimate)
  • Noranda Income Fund (TSX: NIF-U, OTC: NNDIF)–Nov. 8 (estimate)
  • Parkland Fuel Corp (TSX: PKI, OTC: PKIUF)–Nov. 2 (estimate)
  • Pengrowth Energy Corp (TSX: PGF, NYSE: PGH)–Oct. 31 (confirmed)
  • PetroBakken Energy Ltd (TSX: PBN, OTC: PBKEF)–Nov. 8 (estimate)
  • Peyto Exploration & Development Corp (TSX: PEY, OTC: PEYUF)–Nov. 9 (estimate)
  • Poseidon Concepts Corp (TSX: PSN, OTC: POOSF)–Nov. 8 (estimate)
  • Vermilion Energy Inc (TSX: VET, OTC: VEMTF)–Nov. 1 (confirmed)
  • Wajax Corp (TSX: WJX, OTC: WJXFF)–Nov. 2 (estimate)
Here’s where to find analysis of the last set of numbers.

Conservative Holdings

Aggressive Holdings

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