It’s all about the debt

A driving force that pushed me to write my upcoming book, “When the Bubble Bursts; Surviving the Canadian Real Estate Crash,” (Dundurn: March 2015) was the realization that many Canadians had become obsessed with buying real estate and were comfortable with growing mountains of debt. Some baby boomers were buying second and third properties and helping their millennial offspring to buy homes too.

In my research I discovered that Canadians carry some of the most elevated household debt burdens in the world. According to Richard Vague, author of “The Next Economic Disaster: Why It’s Coming and How to Avoid It,” rapid increases in private sector debt are a reliable predictor of economic crises, including the Great Depression and the 2009 Crisis. Canadians are world leaders in adding debt. For example, in the period 2005-2013, Canadian businesses and households grew their debt from about $2.1 trillion to $3.6 trillion, a gain of 70%. Unlike the U.S. where borrowers got cold feet after 2009 and started to pay off loans, Canadians just kept on borrowing more. You can check Vague’s data at debt-economics.org. 

This unprecedented growth in debt should have been sounding alarm bells in the executive offices of chartered banks, the CMHC, the Bank of Canada, and Canadian governments. While a few, like recently-retired CEO Ed Clark of TD, have voiced concern, usually we get cheerleading.

I was shocked to see an October 15 Globe and Mail story quoting a Canadian economist, Benjamin Tal; “Canadians are paying off their debts at a faster rate than the Bank of Canada estimates.” He went on to clarify that debt used to be piling up at more than 10% per annum but now growth is down to “just” 5% per year, and he heralded that as progress. But it’s incorrect to state that Canadians are paying off their debts. And some Canadians haven’t slowed down at all.

CMHC’s mortgage loan insurance supplement for Sept. 30 year-to-date (released Nov. 28) shows that Albertans captured 22.9% of all new insured mortgages by value with just 11% of the population. And the average Albertan with a CMHC mortgage had just 7% equity in their home while the Canadian average wasn’t much better at 8%. More than 50% of all Canadian homeowners with CMHC-insured mortgages have less than 25% equity in their homes.

So don’t believe those misleading headlines! Canadians haven’t found religion yet when it comes to debt and borrowing. One day, probably soon, they will begin to pay down debt, about the same time that home prices start to decline.

When total debt shrinks on year-over-year basis for a couple of years, and only then, can it be said accurately that Canadians have escaped the insanity that grips them regarding household debt and real estate.