Poloz could break our credit addiction
Bank governor sounding drum for raised interest rates
And fear stalked the land.
Shaking the young would-be homeowner anxiously attuned to the slightest uptick in interest rates. Rattling the heavily indebted mid-careerist juggling a swollen home equity line of credit. Awakening the army of acolytes devoted to the mirage of manageability accompanying those shimmering interestonly debt payments.
Again Bank of Canada Governor Stephen Poloz is sounding the drum — well, a little drum — for raised interest rates when the Bank meets July 12. And again, we examine, as if pigeon entrails, the reasons why he should not. Take oil prices, swimming in the range of $40 to $50 (U.S.) a barrel. Surely that’s one indicator in favour of leaving the rate unchanged at 0.5 per cent.
And yet, as Poloz makes clear in an interview with Handelsblatt Global, the English-language edition of the German daily, that oil range assumption has been embedded in policy thinking for two years now.
“Companies we talk to suggest that if oil stays in the range of $40 to $50, that’s a valid assumption for companies to base their plans on. It will figure, but I do not see that as the big issue of the day. Not yet anyway.”
It’s as if Poloz has knocked oil out of the equation for the time being, or at least batted the commodity to the margins.
There’s another key point worth plucking from the interview. In addressing global growth on the upswing, Poloz defines the world economy as “becoming more synchronized.” The watching brief is on when an economy approaches full capacity, he explains, and when that triggers inflation. Yes, that will sound familiar to students of Econ 101, possibly evoking the sound of chalk scratching on a chalk board.
Core inflation in Canada is soft. Poloz explains that the Bank’s task is one of anticipating, looking as far as a 24-month horizon.
“If we only watched inflation and reacted to inflation, we would never reach our inflation target,” he notes. “We’d always be two years behind the reaction.”
Instead, consider a two-year lag behind the U.S., a lag imposed by the oil price shock upon the Canadian economy. That too sounds like Econ 101. In fact, one grows suspicious. The Poloz world tour stopped in Portugal last week, where a CNBC interview had the bank’s governor opining that it appears as though exceedingly low interest rates “have done their job” and that excess capacity was being “used up steadily.” His set list of answers included the synchronicity of global growth and the absorption of lower oil prices. By now you’d think that we would have memorized the lyrics. Remember, a mere month has passed since the Bank’s Financial Stability review warned again of the increasing risk of economic vulnerability associated with household indebtedness, including home equity lines of credit (HELOCs). “The overall level of mortgage debt relative to income continues to rise,” the bank said then. The ratio of household debt to disposable income was near 170 per cent. “The bulk of this growth, about 90 per cent, comes from mortgage credit and HELOCs.”
That 170-per-cent figure disguises the bigger problem: highly indebted households where debt-to-income ratios stand at 400 per cent or even 500 per cent. Of serious concern was the bank’s admission that the increasing use of what it called “hybrid mortgage-HELOC products” prevented any exact analysis of the market, reducing the bank to relying on “rough estimates.”
Remember too that the Financial Consumer Agency of Canada was raising the alarm about HELOCs at about the same time, particularly the popularity of HELOC accounts held under “readvanceable” mortgages that combine term mortgages with HELOCs and other credit products and that pump up the borrowing capacity as the mortgage is paid down. A debt cycle, in other words. Among the more disturbing statistics was this one: 40 per cent of HELOC borrowers do not make regular payments toward their principal. The number of households that have a HELOC and a mortgage secured against their home has risen by nearly 40 per cent in six years.
Canada’s credit addiction, fuelled by our banking leaders, has fuelled the Canadian economy. But addictions have to be broken.
At this juncture, Poloz has seeded enough justification to bump rates. And he should. Buying a house should cause anyone’s heart to flutter. And if a modest increase to rates causes some existing owners to panic, then that’s a sign to revisit the household ledger and focus first on debt repayment. Leave the HELOCfuelled lifestyle by the wayside. jenwells@thestar.ca