Debt time bomb will be ticking after the election
As campaign absurdities fade, the alarming state of our economy will sharpen into focus
The country’s been a bit drunk on the election. And not in an effervescent, celebratory way. This is not the electorate’s fault. On Aug. 2 voters were politely sipping gin and tonics. Or sharing pitchers of sangria. Sun over the yardarm, etc. Now they’re deep into the chewy Cabernets and may observe, with alarm, that an entire case of the stuff has made its way into the boot of the car.
Eleven weeks is a long time. Puppies are conceived and whelped in less.
So we can forgive the fuzzy-headedness that has set in. The sense of discombobulation.
Soon we will emerge from this hangover, forgetting the election absurdities (brothels?) and remembering that this election should have been about the economy and the state we are in.
Some may not have even noticed that just the other day Bank of Canada governor Stephen Poloz was in Washington sharing the bank’s view that monetary policy “should be the last line of defence against threats to financial stability.”
The first line of defence? Borrowers and lenders.
“They (that is, we) bear the ultimate responsibility for their own decisions at the individual and firm level,” he said.
“It is not the role of monetary policy to protect individuals from making bad choices.”
It was a stinging line, especially when we consider the ways in which Canadian consumers have a) been enabled in the decisions they have made and b) kept the Canadian economy aloft.
Recall the September report from Statistics Canada on Canadians’ household debt-to-income ratio, which reached 164.6 per cent at the end of June.
It wasn’t a huge pop from the previously recorded 163. But it was a record nonetheless and, taking the long view, nothing short of alarming. (In 1980, the ratio was 66 per cent. In 1990, 89 per cent. In 2011, 150 per cent. And so on. Even with the divergence in housing market outcomes and asset valuations post financial crisis, it does provide some context to note that in the U.S., debt to disposable personal income peaked at about 130 per cent in 2007.)
Historically low interest rates have now become a long-time boon to consumer spending — enabling, if you will. Previous governors have exhibited a higher level of anxiety on this point.
Poloz sounded almost sanguine this week by comparison, saying that while he is not trying to diminish the “threat posed by elevated household debt,” such concerns are offset, in his view, by rising house prices.
Yet in April, the bank said house prices were overvalued by as much as 30 per cent.
In the U.S., debt to disposable personal income peaked at about 130 per cent in 2007
Homeowners who find themselves baffled and even frightened by the current valuation of their own homes may struggle with this. And may feel vulnerable. And may wonder how they will manage when faced with an inevitable rise in interest rates — so there’s the debt servicing piece — and their ability to save.
Last spring, StatsCan released a report on the debt and assets of Canadian families from 1999 to 2012. The report noted a 6 per cent rise, to 14 per cent, in the number of families whose consumer debt — excluding mortgages, but including lines of credit — has surpassed their after-tax income.
None of the leading political contenders spent much time addressing the debt bomb during the campaign. Stephen Harper acknowledged rising debt levels, but in the context of rising wealth — or inflated wealth, depending on your view. Thomas Mulcair would attack unconscionable credit card interest rates. And Justin Trudeau would put more money in the pockets of the highly indebted via a middle income tax break.
Whoever wins, Canadians are now on notice. When it comes to financial stability, the first line of defence is us.