A GreaterFool rule oft mentioned is this: buy what appreciates, rent what depreciates. Hence, it’s okay to buy a house if at the right price, in the right place. But it’s almost always dumb to cash-buy a new car.
You’d think most people would figure this out. Instead of shoveling over thirty grand for a soul-sucking minivan, they’d be far better of stuffing that money into their TFSA and investing it, and letting the dealer or the bank give them the car. After all, in ten years the TFSA money should double to $60,000. The minivan will be worth (maybe) ten thousand.
Well, seems this is academic for most folks, anyway, since they don’t have any money. Car loans have exploded, and it’s no coincidence this has happened concurrently with a housing boom and a crappy job market. Real estate continues to skim off huge hunks of household cash flow, leaving precious little for wheels, investing, or a Plan B.
Moody’s Investor Service has just tallied this. Ugly. Seven years ago car loans totaled $16.2 billion, which is a giant pile of money. Today that pile is $64 billion – an increase of 300%, or 20% a year. But it gets worse.
As you know, these loans now have terms of eight or nine years, which exceeds most marriages and is longer than the lifespan of most Great Danes and almost all Kias. And despite a stuttering economy, the combination of cheap rates and ridiculously-long pay-back periods has created a boom in car sales. The dealers are having a banner year. Plus, says Moody’s, this also has people buying more expensive rides, so they can roll around and look like rockstar realtors.
So, record car sales. Record car debt. Oh, and record car loan delinquencies.
They jumped more than 13% last year, compared to a drop in missed payments on credit cards and lines of credit. “Credit losses have been low, but could rise quickly in an adverse scenario of unemployment increases or rapidly rising interest rates,” says the rating agency. “If the economy takes a turn for the worst, we could see these loans becoming problematic for the banks.”
Well, let’s turn to jobs for a minute. There must be a correlation between the labour market and an unprecedented demand for consumer credit. A constant run-up in debt would suggest most families are not bringing in enough income to sate their spending habits, which would support the Bank of Canada’s warning that household finances suck (a technical monetary term).
This is a thesis Randall Bartlett is proving. He’s a senior economist at TD Bank which has unveiled a new measure of the job market. Finally. The StatsCan monthly employment roller-coaster has turned into a bit of a joke among the biker-economists I hang with. The swings are so wild as to cast doubt on the validity of the data, with abysmal losses being replaced by flowery gains in a matter of weeks.
So the bank’s launched a Labour Market Indicator to try and get a truer picture on who’s working, and (as importantly) the nature of unemployment. If this is a better tool, we’re a little more screwed than we all thought. Says the bank:
- “The Canadian labour market is currently experiencing more weakness than is implied by … the headline unemployment rate alone, and has been for nearly two years.”
- About 20% of all the people out of work these days have been that way for at least six months – the long-term unemployed.
- The bank says the numbers of people in this group jumped during the GFC, which is to be expected – but that levels have not come down since 2009.
- Meanwhile the number of working-age Canadians (between 25 and 54) in the workforce is on the decline, down 2% in two years. This, says TD, “is a characteristic of a weak labour market.”
- So while the official jobless rates is 6.8%, the bank says it’s actually about 7.2%. In the US, by the way, unemployment is now 5.9%.
And Bartlett confirms what this pathetic blog has started for a couple of years – incomes have flatlined. Wage growth of about 2% is running a little below the inflation mark, which means most families are spending more and actually making less. That’s supported by the Canadian Payroll Association, which claims over 50% of us could not last a week past one missed paycheque.
This is what you get when a country opts for a condo economy. Massive spending on housing and consumer goods, supported by an historic increase in debt because a weak jobs market and zero income growth mean Joe Frontporch is treading water. Our manufacturing base has shrunk and a quarter of the economy is now centred on real estate. Were it not for low rates that allow so many to meet their gargantuan monthlies, we’d be pooched. And none of this is coincidental.
Tell me how it works out well.