Entries from September 2017 ↓

House of cards

RYAN  By Guest Blogger Ryan Lewenza

Without completely spoiling for those who live under a rock and haven’t seen the most recent season of House of Cards, let’s just say that the walls are closing in on the protagonist President Underwood, and that things are about to unravel for him in the next season. Many believe the same is destined for the average Canadian household, and in turn the Canadian economy, given our record debt levels and now rising interest rates. While I share these concerns, my conclusions are far less dire than others, which is why I don’t yet own a life supply of tuna cans, a shotgun, and a zombie apocalypse survival kit. In this week’s blog I examine the state of the current Canadian household income and balance sheet, and try to express a more balanced outlook for the average Canadian and our economy.

First, and stating the obvious, Canadians have thrown caution to the wind by dramatically ramping up their debt levels, in large part to fund rising real estate purchases. Total household debt increased to $2.07 trillion in July, which equates to a compounded growth rate (CAGR) of 10.7% since 1980. Of this $2.07 trillion total debt, mortgages account for $1.48 trillion or 71.5%, which is up from 66% in 1980.

Looking at income growth over this period, total Canadian household disposable income has increased from $170 billion in 1980 to $1.2 trillion currently, which equates to a CAGR of 7.1%. So with debt rising at a much higher rate than income growth, we get that rising debt to household income ratio seen below, which currently sits at 170%, up from just 87% in 1990.

As a huge Elvis Presley fan, I can’t help think that our current situation resembles “the King’s” later years when he tipped the scales at over 300 pounds and was gorging on peanut butter, banana, and bacon sandwiches like they were M&M’s. I really hope the average Canadian doesn’t end up like Elvis, slumped over on the toilet with a bad case of constipation or even worse.

Canadian Household Debt and Income Growth

Source: Bloomberg, Turner Investments


Canadian Household Debt to Income at New Record High

Source: Bloomberg, Turner Investments

Looking at the debt and income statistics one might prematurely conclude that the average Canadian, and our economy, is for the lack of a better term, screwed. We believe this is a bit simplistic and a stretch.

First, job growth in Canada remains very strong which is helping to support income growth. Over the last twelve months the Canadian economy has added 375,000 new jobs with income growth up 3.8% Y/Y. Yes we see interest rates grinding higher which will put additional stress on Canadians over time, but if the labour market remains strong then we expect income growth to hold up, helping to service the higher debt costs.

Second, household consumption is not the only driver of an economy. In Econ 101 we learned that every economy is driven by four main factors. Recall GDP = C (consumption) + G (government) + I (investment) + X (net exports). Even if consumption slows down, which is our belief, then other areas may be able to pick up the slack. With the US and global economy improving we see the potential for higher exports, which would help our manufacturing, resource and other exporting industries. Business investment, which was crushed during the 2015-16 oil collapse, is expected to rebound in the coming years, and government spending could add to economic growth as infrastructure spending picks up.

Third, we saw very similar debt to income statistics in the US prior to the financial crisis with their household debt to income ratio peaking at 168% in 2007. Since then we’ve seen this ratio decline steadily over the years to 140% today. Note below how over this period the US economy continued to grow, albeit at a lower growth rate.

I think this example is pretty instructive as it shows that a declining US household debt to income ratio resulted in a lower growth rate but not a complete collapse in their economy (of course excluding the 2008-09 recession which was short-lived).

So that’s what I think we should expect from the Canadian consumer and economy in the coming years as the average Canadian household begin to address their bloated debt levels and begin to deleverage. We should expect to see lower consumption, and in turn GDP growth, but not a complete meltdown in our economy as some predict.

Bringing it back to my Elvis analogy, instead of Elvis killing himself with excessive eating and a lack of exercise, Canadians are likely to join a Weight Watchers clinic for debt, and slowly over time reduce their bloated debt levels. This will likely result in lower economic growth over the next few years, but not slumped over, dead on the toilet as “the King” did on that sad day.

US Household Debt to Income and GDP

Source: Bloomberg, Turner Investments
Ryan Lewenza, CFA,CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Vice President, Private Client Group, of Raymond James Ltd.


While poor Bill Morneau was being hammered at his Oakville town hall meeting Friday morning, there was bad news on Bay Street. Not about taxes – which the finance minister wants to jack on small business owners – but for housing, which is sacred.

Here’s what we know going into the last weekend of September, which was supposed to go all Lazarus, and jolt back from the dead. It didn’t.

Prices are stable, but sales have not revived. In the GTA, for example, volumes were down about 40% year/year. The story is similar in both Toronto and Vancouver – condos and entry-level houses are selling fine, detacheds and McMansions are unloved and sinking fast. In Van’s tony Westside hood, for example, the number of deals this month is expected to crash by half. First-timers are still spending. The move-up market’s a disaster.

This, say some experts worth listening to, will get worse. September might turn out to be the high point until next April, or maybe for a year. Or longer. Because of the universal mortgage stress test adding 2% on top of current rates, says RateSpy guy Rob McLister, people will simply qualify to borrow less than sellers demand. “Toronto is especially vulnerable to Ottawa’s next round of tightening,” he told that awful network, BNN. “If you’re a lender active in the Greater Toronto Area, the worst may be yet to come.”

According to RBC, Van and TO are already pooched. Housing affordability is at the worst level since Brian Mulroney was winning an election on free trade with the US (my, how things have changed). The bank says the ability of average people to buy average houses in the GTA plunged in the last few months despite the market cooling – and the coming interest rates run-up could erase the effect of future price declines.

It now takes 75.4% of a family’s pre-tax earnings (or just over 100% of what’s actually brought home) to buy and carry a house, even after a massive 25% down payment. That rate soared almost 13% in the second quarter of 2017, while it fell a little in Vancouver (to 81% of income). Across Canada, the bank found families must devote 46.7% of gross income – a deterioration to levels not seen since 1990, when a five-year mortgage cost 12.25%. Ouch.

As bad as that is, it gets worse. RBC expects four more Bank of Canada increases in the next 15 months, plumping mortgages a full 1%. Add in the stress test for a 3% bump – almost doubling the current five-year rate of just over 3%. That single-point mortgage increase will worsen affordability by 3.5% across the country and double that in YVR, says the bank. “This would occur at a time when housing affordability is already stretched in some of Canada’s largest markets.”

Hmm. Meanwhile the Trumpster says he’ll announce the next Fed chair in a couple of weeks, with a notable hawk now heading up the short list. Given that planned American tax cuts will boost economic growth and inflation, it’s a fair bet US interest rates will be dragging ours even higher over the next couple of years.

Does this mean real estate will crash and burn?

Nah, unlikely. But it does suggest prices will flatline, then melt, as Canadians – already carrying a record debt load – are able to borrow less. When money resembled this blog (dirt cheap and available), house values soared. So when credit contracts, expect the opposite. There’ll be further tightening through a stress test for all borrowers. And you can count on central banks normalizing rates at levels which will make current ones look like whimsy.

Buying in 2017, kids, might turn out to be just as good a choice as that butterfly neck tat.

$     $     $

Back to Bill. Friday’s event was brutal, even though Finance guys tried to control things tightly, with a curt one-hour format that left many angry people standing in front of dead mics. Still, it was an overall negative for the finance minister whose slip-shod tax reform plans have turned doctors, farmers, vets, contractors, accountants, hairdressers and indy IT guys into political vigilantes. The Oakville meeting was the final, ugly event in a Lilliputian 75-day consult period.

If comments on this blog are any indication, T2 and his crew have been successful in starting a class war. By calling small business people, farm families and incorporated pros tax cheats and loopholers, Ottawa’s vilified millions who have violated no laws. The government has driven an unhealthy wedge between the salaried and the self-employed with the same inflammatory language and devices Trump used to brilliantly divide and conquer. Who would have thought?

Well, here’s an example. Just received this suggestion from a fan:

What I’d like to know is how many millions Garth is worth as he sits on his throne casting stones at the new tax laws that aim to make things more fair. Elitist if I ever saw one. This blog is so out of touch with public opinion. How about call this blog: greatermillionaireelitistfool.ca

I like it.