Tuesday, January 31, 2012

CMHC backing fewer loans

Synergy Debt Group

CMHC backing fewer loans

Garry Marr Jan 30, 2012 – 7:13 PM ET | Last Updated: Jan 30, 2012 7:18 PM ET

Canada Mortgage and Housing Corp. is cutting back on mortgages it insures as the Crown corporation edges closer to a $600-billion cap imposed on it by the federal government, the Financial Post has learned.
A CMHC spokesman confirmed that it had approached a number of lenders at the end of 2011 about reducing its “bulk or portfolio insurance” after third-quarter results showed the agency had committed to back $541-billion in mortgages. CMHC, which guarantees mortgages held by financial institutions, is ultimately backed by the federal government and needs approval to go over the $600-billion limit — something that would create greater risk for taxpayers should the housing market collapse.
“CMHC has recently received an unexpected level of requests for large amounts of CMHC portfolio insurance.” said Charles Sauriol, a spokesman for the Crown corporation, in an email.
“To ensure equitable access to portfolio insurance within CMHC’s annual limits, an allocation process is being established which has caused some delays. Portfolio insurance provides lenders with the ability to purchase insurance on pools of previously uninsured low ratio mortgages and does not impact CMHC’s transactional business.”
Financial institutions are required to have mortgage-default insurance when a consumer has less than 20% equity. However, the banks have been seeking insurance on loans with even high downpayments — something not required by law — so they can securitize those bulk lending loans, thereby getting them off their balance sheets and reducing their capital requirements. In those cases in which the loans to value is less than 80%, the bank pays the insurance charge instead of the consumer.
“One of the things that has got them [to the limit] faster than expected is they are doing a lot of conventional insurance for lenders,” said one source. Just three years ago, CMHC had $450-billion in loans it was backstopping and had to go to the government to get that increased to $600-billion.
“I think as a taxpayer you should care. The policy question is why should the Canadian taxpayer take that type of meltdown risk within CMHC,” the source said.

The risk to the taxpayer would be a collapse in the market leading to a defaults like the U.S. saw. If CMHC couldn’t cover those defaults, Ottawa is on the hook for 100% of any shortfall.
On the surface, insuring conventional loans may not appear as risky as traditional mortgage default insurance because it comes with more equity. The banks have been demanding ultra low fees on the conventional mortgages, arguing the equity position makes them a lower risk. However, lenders are skimming their portfolio to load up mortgages that are 70% to 80% debt to equity and may also have other problems, said a source.
With mortgage defaults well below 1%, some might argue the risk to CMHC is negligible. “If you look at what is backing [CMHC’s] guarantee, it should be more than enough to cover any downturn in the market,” said one banking source, who asked not to be identified, about CMHC’s cash reserves. “Besides, what will the government do, not increase their limit? This could kill the entire housing market.”
CMHC gave no indication it would seek an increase in its limit.
“CMHC’s mortgage loan insurance limit in force is $600-billion. CMHC manages its mortgage loan insurance business in accordance with this limit,” said Mr. Sauriol.
The Crown corporation would be going to the government looking for an increase in its limit at a time when both Bank of Canada Governor Mark Carney and Finance Minister Jim Flaherty have been casting a wary eye at the housing market.
“We watch the housing market carefully and we are prepared to intervene if necessary. Having said that, we’re not about to intervene in the housing market now,” said Mr. Flaherty this month. For his part, Mr. Carney said “we see that in a number of real estate markets in Canada, valuations are at a minimum, firm; in others, they’re probably overvalued. So there are risks there.”
Sources have indicated the government is already considering tough new measures for calculating how the self-employed qualify for loans and tightening regulations for condominium buyers, so there is probably little appetite for backstopping even more debt from CMHC. In addition to CMHC, the government has a $300-billion limit for private mortgage default insurers.

End of article

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About Synergy Debt Group
Synergy Debt Group provides debt management programs to help consumers get out from under the "Minimum Monthly Payment Trap." It offers relief from the burden of debt and alternatives to bankruptcy and financial ruin. Synergy Debt Group makes it possible for its clients to gain financial independence and achieve their goals.

Monday, January 30, 2012

Oil prices decline on easing tensions in Iran, flat US consumer spending

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Oil prices decline on easing tensions in Iran, flat US consumer spending

By Chris Kahn, The Associated Press | January 30, 2012
NEW YORK, N.Y. - Oil prices are down on concerns that the U.S. economy could slow and worries eased about supply disruptions in the Persian Gulf.
Benchmark West Texas Intermediate crude fell by 35 cents to US$99.22 a barrel in New York midday trading Monday. Brent crude, used to price oil imported by U.S. refineries, lost 45 cents to US$111.01 a barrel in London.
Victor Shum, an energy analyst with Purvin & Gertz in Singapore, said earlier that crude prices were volatile after Germany's finance minister warned that Europe might not give Greece a fresh bailout unless it can overhaul its state and economy. Analysts fear that could re-ignite the region's debt crisis.
European leaders were meeting in Brussels on Monday to discuss austerity measures and a tentative deal reached Saturday between Greece and its private investors to avert a disastrous Greek default on its debt.
"The situation in the eurozone continues to remain gloomy without any clarification about Greek issues," said a report from Sucden Financial in London.
Supply concerns also weighed on the market although Iran has postponed plans to immediately cut the flow of crude oil to Europe in retaliation for planned EU sanctions over its nuclear program.
"This reduces the danger of an immediate supply shortage in the oil market, which also puts prices under pressure," said analysts at Commerzbank in Frankfurt.
Meanwhile, Iran also welcomed international weapons experts into the country in hopes of refuting claims that it is building a nuclear weapon. That eased concerns about possible military action in the region.
And in Washington, the Commerce Department said Americans kept a tighter grip on their wallets in December. The U.S. economy relies heavily on consumer spending and analysts say the recovery could stall, weakening energy demand, if it doesn't pick up.

End of article

About Synergy Debt Group
Synergy Debt Group provides debt management programs to help consumers get out from under the "Minimum Monthly Payment Trap." It offers relief from the burden of debt and alternatives to bankruptcy and financial ruin. Synergy Debt Group makes it possible for its clients to gain financial independence and achieve their goals.

BANKS FACE RATINGS DOWNGRADE ON FUNDING

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BANKS FACE RATINGS DOWNGRADE ON FUNDING

The big four banks are likely to know by April if their credit ratings have been downgraded by a notch because of their funding dependence on global debt markets, ratings agency Fitch says.

The global credit ratings agency yesterday placed the AA ratings of Australia and New Zealand Banking Group (ANZ), Westpac, National Australia Bank (NAB) and Commonwealth Bank (CBA) on ratings watch negative.

The move came after Fitch started a review of big global banks last October, including Canada's big six banks.

Fitch's announcement comes almost two months after Standard & Poor's (S&P) issued its first downgrading of Australian banks in two decades.

S&P on December 2 downgraded the big four by one notch from AA to AA- after making changes to its ratings criteria.

Both Australian and Canadian banks are rated highly by the three major global ratings agencies (including Moody's Investors Service) and they share similar market structures.

When compared with their global peers, the two banking systems are among the most concentrated in the world, Fitch said in a report yesterday.

However, Australian banks' persistent dependence on offshore wholesale credit markets for funding make them riskier, Fitch director of financial institutions, Tim Roche, said.

"The Canadian banks have a much stronger funding profile - they're less reliant on wholesale funding and (have) much more deposit funding within their mix," he said.

Canada's big six banks rely on deposits to support between 68 to 88 per cent of their funding, according to Fitch's report.

By contrast, deposits account for between 54 and 65 per cent of the funding mix for Australia's big four banks, with term debt sourced from offshore credit markets accounting for around 20 per cent.

Fitch said it expected to resolve the ratings watch negative status for local lenders by April.

"Given there's one issue we're looking at - the wholesale funding of the Australian banks - I'd expect (a decision) to be ... as short as a month or a month-and-a-half," Mr Roche said.

Fitch's long-term issuer default ratings for CBA, Westpac and NAB currently stand at AA, and the rating for ANZ is AA- due to that bank's strategy of expanding into Asia.

"Whilst they are actually undertaking that expansion we think there are some risks there that the other banks in the system don't necessarily face," Mr Roche said.

Any downgrade would be limited to one notch and would probably be applied to CBA, Westpac and NAB before ANZ.

"The banks that are rated at double-A have a higher probability of a downgrade than ANZ, and any downgrade is likely to be limited to one notch," Mr Roche said.

Four of the six Canadian banks have AA- ratings from Fitch, while one has a AA rating and the other is rated A+.

End of article

Thursday, January 26, 2012

Boomers driving spike in household debt

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Boomers driving spike in household debt

TAVIA GRANT from the Globe and Mail Blog

People over the age of 45 and already-heavy borrowers are driving virtually all of the increase in Canada's household debt load, a new study has found.
The report, to be released Thursday, crunched numbers at the micro-level to shed light on what's going on behind the national averages, which soared to record highs last year.

Will Canada follow the U.S. on interest rates?

It finds that the most heavily-indebted are responsible for all of the rise in debt since 2007, and that those who should be saving for retirement and building assets are moving fastest into a financial hole.
“While a crisis does not appear imminent, there are cracks emerging in the financial foundation of Canadians that are likely to impair spending growth ahead,” say the report's authors, CIBC economists Avery Shenfeld and Benjamin Tal.
Ballooning household debt has made headlines in recent months, and Bank of Canada Governor Mark Carney has warned it is the No. 1 domestic risk to Canada's economy.
Low interest rates have driven recent debt growth. But that's not all – household income growth was weak last year, just as inflation heated up. As a result, real disposable income fell 0.1 per cent in the first three quarters of 2011, the bank said – another reasons why people got squeezed.
High household indebtedness doesn't necessarily mean Canada is facing a U.S.-style crash -- as CIBC points out, Denmark's levels are “light years” ahead of Canada, and so are those of the Netherlands and Switzerland.
But they do bear watching closely, because they suggest more Canadians are financially vulnerable to sudden changes such a job loss, drop in housing prices or increase in interest rates.
Other economists, too, have flagged that it is older Canadians who are piling on debt. In October, a TD report found the 65-plus age group are racking up debt at three times the average pace.
The findings have implications for retirement trends, and consumer spending. “Canadians nearing retirement who should be in their prime savings years are, instead, getting themselves deeper into debt,” the CIBC report said.
“We are already seeing an uptrend in bankruptcies for those 50 and over, but the more material impact will be that this group’s ability to spend could be severely squeezed upon retirement.”
As for heavily indebted borrowers, the study finds virtually of the rise in debt in the past four years comes from people with a high-debt-gross income ratio. “The indebted have piled on still more debt,” it said.
As a result, the share of heavy borrowers has soared -- to 34 per cent of all indebted households today, compared with 26 per cent in 2007.
Among provinces, British Columbia and Alberta have the highest share of heavy borrowers.
The bank doesn't anticipate any sharp run-up in household bankruptcies. But it does suggest consumers won't contribute much to economic growth this year, just as governments are cutting back. Businesses, therefore, will have to do the heavy lifting in propelling growth.

End of article

Wednesday, January 25, 2012

Canada's employment picture losing luster: report

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Canada's employment picture losing luster: report

By Nirmala Menon

OTTAWA -(MarketWatch)- Canada's employment picture is losing luster even as the U.S. shows signs of improvement, with the Canadian job market now weaker than in any other non-recessionary period, according to a new report from CIBC World Markets.
The author, economist Benjamin Tal, said a likely drop in house prices will have a "far from gentle" impact on the economy and construction employment. This, together with expected layoffs in the public sector from government austerity measures, is casting a shadow on employment over the next year as uncertainties from the euro-zone crisis take a toll on economic growth.
Prime Minister Stephen Harper and his Cabinet ministers, including Finance Minister Jim Flaherty, often boast that Canada has had the best record of job creation among the Group of Seven most industrialized nations since the recession, with almost 600,000 net new jobs added since July 2009. But the economy suffered net job losses in two of the last three months, and the unemployment rate increased to 7.5% in December from 7.1% in September.
"Regardless of how you look at it, the pace of job creation in Canada is weak. In fact, on a three-month moving average basis, the job market is currently weaker than any non-recessionary period," Tal wrote in the report.
In an interview, he said the Canadian and U.S. employment markets are beginning to diverge. To be sure, the Canadian market is starting from a higher level while the U.S. is picking up from a low base. Still, "the trend is a slowing Canadian market in the environment of a marginal improvement in the U.S.," Tal said. As economic activity slows, he predicts there will be "very little job creation" in Canada over the next 12 months.
The International Monetary Fund Tuesday cut Canada's growth forecasts as the crisis in Europe plunges the euro zone into recession and drags on global output. The IMF expects the Canadian economy to grow 1.7% in 2012, slower than the 1.9% predicted previously. The forecast for 2013 was slashed to 2% from 2.5%.
Tal said job losses in the public sector will weigh, as the government cuts back spending to balance the budget. The construction sector also probably won't be a major employer with the end of infrastructure stimulus spending, and a likely slowing in the housing market. Tal isn't predicting a housing crash but "I definitely can see a situation where house prices will fall 10-15%" over the next two years," he said.
This, coupled with slowing income growth, will likely temper consumer spending as Canadians use a greater share of their incomes to service debt. Tal said incomes are rising at the slowest rate since 1995 because the quality of jobs has declined. His analysis shows that the number of high-paying, full-time jobs rose just 0.4% last year, one-quarter the pace of low-paying jobs. He said slowing income growth also explains why household debt in Canada is at record levels.

end of article

Consumer debt in Canada going into home ownership rather than retail sales

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January 25, 2012

Consumer debt in Canada going into home ownership rather than retail sales

Alex Carrick -- Chief Economist, CanaData

Retail sales in Canada in November, the latest month for which data is available, were +0.3% month to month and +3.1% year over year, according to a recent report from Statistics Canada.
Those numbers aren’t bad – a figure around +5.0% is the long-term “norm” – but they pale compared with what’s been happening in the United States.
According to the Census Bureau, year-over-year retail sales south of the border were +7.6% in November and +7.0% in December, more than double Canada’s pace.
This seems odd given that Canadians haven’t been taking action to lower their debt to anything like the same extent as their American cousins.
Let’s look at some other related variables.
On Tuesday, January 17, the Bank of Canada decided once again to hold its key policy-setting interest rate at 1.00%. The overnight rate has been flat since the fall of 2010.
That’s not the lowest the overnight rate has ever been. It was only 0.25% from early 2009 through early 2010.
In the summer of 2010, there were three 25 basis point increases (100 basis points equals 1.00%) as the Canadian economy recovered rapidly from the recession and inflation became a concern.
The Euro debt crisis quickly turned the external environment uncertain and, more recently, China’s growth rate has been moderating to the point where it reached a 10-quarter low in Q4 2011 at +8.9%.
The impact of slower growth in the emerging world has lowered most commodity prices, with the notable exception of oil, and inflation has eased back.
The U.S. economy, on the other hand, has the potential to do a great deal better than previously thought.
Nevertheless, the U.S. Federal Reserve has said it won’t be raising rates until mid-2013 at the earliest. Therefore, a Canadian rate increase would add upward pressure to the value of the Canadian dollar.
That would hurt a Canadian manufacturing sector that needs to sell into the U.S. market.
A great deal of Canadian manufacturing activity is auto related. In turn, a high proportion of that output is sold across the border.
An interesting statistic has just been released by auto-sector data firm, R. L. Polk & Co., as reported in the Globe and Mail. The average age of vehicles on the road in the U.S. rose to 10.8 years in 2011.
Due to demands for better quality and higher material and parts standards, the figure has been rising from what was once, a long time ago, a base of six years.
This has significant implications for auto demand. Before the recession, annual unit sales of vehicles in the U.S. averaged about 16 million. In 2005, they peaked at 17 million.
In 2009, during the worst of the recession, motor vehicle sales in the U.S. fell to only a little more than 10 million units. Since then, they’ve recovered to 13 million.
There is a second part of the equation that will determine if the sales rate stays somewhere between 13 million and 14 million, or rises back to the longer-term average of 16 million.
The number of vehicles per driving-age population in the U.S. is about 100%. (In Canada, it’s said to be about 75%).
A drop in the vehicle-to-population ratio would suggest that U.S. car sales will be relatively less buoyant than in the past.
With the emphasis that is being placed on deleveraging consumer debt in the U.S., this seems to be a strong likelihood.
Meanwhile in Canada, concern over debt levels – which have not been tackled nearly as seriously as in many other countries – continues to grow.
The household debt to disposable income ratio in Canada rose to 153% in Q3 2011. A year before, it had been 146%. The Bank of Canada, in its most recent monetary update, regrets to say that it expects the ratio to keep increasing.
Mortgage credit accounts for nearly 70% of total household debt. Canada’s largest banks have just launched a mortgage rate war.
Some five-year fixed rate mortgages are now being offered at only 2.99%. If you’re looking for an interest rate that is a record low, go no further.
Governor Mark Carney has spent much of the past year warning Canadians about the dangers of taking on more financial commitments, given that rates are certain to rise again eventually.
A number of analysts have suggested that the threshold ratio at which debt-to-income tipped housing markets over into real trouble in the U.S. and U.K. was 160%.
Over the past couple of years, Canada’s Finance Minister Jim Flaherty has twice instituted measures to slow mortgage borrowing. The amortization period to qualify for federally insured mortgages was lowered from 35 to 30 years. The loan-amount-to-appraised-value percentage for refinancing was also decreased.
Further restrictive steps would come as little surprise. A number of bank executives have already expressed their support for another cut in the insurance coverage period to 25 years.
For more articles by Alex Carrick on the Canadian and U.S. economies, please see his market insights. Mr. Carrick also hasan economics blog.

end of article

Tuesday, January 24, 2012

Canadian Stocks Decline as Greece Debt Talks Reach Stalemate

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Canadian Stocks Decline as Greece Debt Talks Reach Stalemate

By Matt Walcoff - Jan 24, 2012 10:59 AM ET

Canadian stocks fell for the first time in five days as talks between European finance ministers and holders of Greek debt reached a stalemate and the euro dropped against the U.S. dollar.
Royal Bank of Canada (RY), the country’s largest lender by assets, declined 1 percent. Potash Corp. of Saskatchewan Inc., the world’s biggest fertilizer producer by market value, decreased 2.5 percent after an analyst at JPMorgan Chase & Co. cut his rating on the shares. Semiconductor designer Gennum Corp. (GND) soared 118 percent after agreeing to be bought by Semtech Corp. for about C$500 million ($494 million).
The S&P/TSX Composite Index (SPTSX) slipped 91.31 points, or 0.7 percent, to 12,430.39 at 10:58 a.m. Toronto time after closing at a four-month high yesterday.
“The clock is really ticking for the Greeks,” Sebastian van Berkom, a money manager at Van Berkom & Associates in Montreal, said in a telephone interview. The firm oversees about C$1.7 billion. “If it’s finally confirmed that one of the euro members actually defaults, the next question is, ‘Who’s next?’”
The index gained 4.7 percent this month through yesterday as improving employment and manufacturing data in the U.S. overshadowed the European debt crisis. The S&P/TSX slumped 11 percent in 2011 as concern the crisis would hamper global growth led to declines in commodity producers’ shares.
European finance ministers refused to increase their offer of 130 billion euros ($169 billion) in public funds for a second Greek debt program. They sought to make bondholders accept lowerinterest rates on new bonds than the investors want.

Streak Ends

The S&P/TSX Financials Index (STFINL) declined for the first time in seven days. Royal Bank lost 1 percent to C$53.76.Bank of Nova Scotia (BNS), Canada’s third-largest lender by assets, decreased 1.1 percent to C$53.97. Manulife Financial Corp. (MFC), North America’s fourth-largest insurer, slipped 1.5 percent to C$12.57.
Potash Corp. retreated 2.5 percent to C$44.78 after Jeffrey Zekauskas, an analyst at JPMorgan, reduced his rating on the stock to “neutral” from “overweight.” In a note to clients, Zekauskas cited the 18 percent gain in the company’s U.S.-traded shares from Dec. 19 to yesterday and a preference for shares of Agrium Inc.
Barrick Gold Corp. (ABX), the world’s largest gold producer, fell 1.8 percent to C$46.45 after Stephen D. Walker, an analyst at Royal Bank, cut his rating on the shares to “sector perform” from “outperform.” Walker had had an “outperform” rating on Barrick since June 2009.
Gennum surged 118 percent, the most since at least 1987, to C$13.41 after Camarillo, California-based Semtech agreed to buy it for C$13.55 a share. Last month, Sterling Partners bought Ottawa-based Mosaid Technologies Inc., which licenses semiconductor patents, for about C$590 million.
BlackBerry maker Research In Motion Ltd. (RIM) fell 4.2 percent to C$15.02. The shares tumbled 9.1 percent yesterday after new Chief Executive Officer Thorsten Heins said he planned no “drastic change” after replacing Mike Lazaridis andJim Balsillie, who shared the role until Jan. 22.
Canadian National Railway Co. (CNR), the country’s largest railroad, dropped 2.1 percent to C$77.91 after forecasting a smaller earnings increase this year than most analysts in a Bloomberg survey had estimated.
To contact the reporter on this story: Matt Walcoff in Toronto at mwalcoff1@bloomberg.net

End of article

Manitobans Warned About Debt Companies

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Manitobans Warned About Debt Companies

Portage ONlIne
Written by Jeremy St. Louis

The Financial Consumer Agency of Canada is issuing a warning to Manitobans to be wary when it comes to claims being made by debt reduction companies.

FCAC spokesperson Julie Hauser says some companies are claiming they can slash your debt significantly - claims she says are not guaranteed. Hauser says because of that, they've sent out a warning.

"We've put out an alert to consumers to warn them to be very cautious about companies that claim they can negotiate a deal to cut the amount of debt that you have to repay to your creditors. In some cases, people are getting phone calls that say that they can have their debt reduced by 60% or even more."

Hauser has some questions people can ask if they are contacted by one of these companies.

"One of the things you should ask is about the fees. Some companies will charge over $1000. Another is whether there is any guarantee that your debt will be reduced as they say. Otherwise, you could end up paying the fees and get nothing for it."

She adds if your debt is getting out of control, your best option might be a Credit Counselling Agency. They usually don't charge fees for services and they are much more reputable, with a stronger track record. At the end of the day, she says it all goes back to that old adage...

"If it sounds too good to be true, it probably is. Take the time to chekc it out, don't agree to anything on the phone. Do some research, ask questions, call them back. If it is something you're interested in doing, take the time to find out and get your questions answered."

Monday, January 23, 2012

Bank of Canada head says U.S. economy unlikely to fully recover

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Bank of Canada head says U.S. economy unlikely to fully recover

By Andrew Moran
Jan 23, 2012 - 3 hours ago in Business

Ottawa - Bank of Canada governor said in a recent interview with a news outlet that the United States economy is unlikely to fully recover. Citing billions in lost exports, Carney pointed to China and the Asia-Pacific region as potential trading partners.
Digital Journal reported in November that during a speech to the Economic Club of Canada, Alberta Premier Alison Redford urged the federal government to have less dependence on the United States and focus more on exporting to various Asian nations, especially energy.
Another key Canadian figure is now also urging governments and the private sector to direct fewer resources to the U.S. and begin trading in the Asia-Pacific region, specifically the Chinese market.

AIn an interview with CTV’s Question Period, Bank of Canada governor Mark Carney, the nation’s central bank head, explained that the U.S. economy may take a while to become an economic powerhouse again and actually may never fully recover. He stated that Canada must look elsewhere to export its goods.

The economic decline south of the border is hurting Canada approximately $30 billion per year due to the paucity of exports. Furthermore, the European economic and sovereign debt crises are also costing the Canadian economy about $10 billion or 0.6 percent – Carney believes consumer spending and business investments as ways to curtail the decline in growth.
“The nature of the U.S. recovery, it's going to take a number of years before they get back to the U.S. that we used to know,” said Carney, a former Goldman Sachs executive director. “In fact, they are not in our opinion ultimately going to get back fully to the U.S. we used to know.”
Although Carney believes it would take quite a bit of time to enhance a relationship, the central bank head noted that China has a great deal of potential for trade because it “under-represented.”
“It’s going to take multiple visits, multiple initiatives. Not, obviously, from the public sector alone, but clearly a focus from the private sector,” added Carney. “That is absolutely essential for developing our future and it’s a key element of our medium-term growth.”
This latest forecast of Carney’s comes as he recently warned about the accumulating Canadian household debt that has inflicted the nation’s economy. The bank estimates that for every dollar a Canadian owns they owe $1.54.

End of Article

Why are Canadians so bad with money?

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From the Gaunlet
Why are Canadians so bad with money?

Eric Mathison
Editor-in-Chief

While not as high as before the great recession began in 2008, consumer debt in Canada (the amount of debt individuals have, rather than the amount the government owes) is higher per capita than that of the United Kingdom and America. Household debt hasn't dropped dramatically since the financial crisis, and consumers seem just as likely to buy products on credit as they were in 2007 -- a depressing fact given that the job market is still fragile, and that low interest rates are encouraging people to buy homes.

Financial literacy, which refers to how well people can make informed decisions about their finances, is sorely lacking in Canada. Like an overweight smoker who doesn't change his life until he has a heart attack, Canadians are risking their financial safety by taking on too much debt, not saving enough and being altogether oblivious to the problem.

There is no shortage of people to blame. For us twenty-somethings, it was easy to get jobs in high school. Entering university, some of us decided to work to pay for our degree but student loans were available, so we imbibed, often more than we should have. We can also blame our parents, who in many cases failed to have the "other talk" with us. The last piece of the puzzle is the lack of financial education provided in secondary schools. Career and Life Management, a required course to earn a high school diploma in Alberta, is a good class in theory, but in practice it fails to provide even a modicum of useful education.

There's a difference between good debt and bad debt, with taking a loan to pay for education usually considered the former. A post-secondary education is considered a good investment overtime because those with post-secondary education on average make more than those without. Unfortunately, bad debt like credit cards is mixed in, so now many graduates aren't earning enough to pay the interest on their loans. Many others, while not facing bankruptcy, have no idea how much they're spending and lack a plan for their financial future.

We are swimming in a cornucopia of personal finance information. The problem isn't that there is a dearth of information, but that Canadians aren't following the simple steps required to achieve financial comfort. It seems painfully obvious that you shouldn't be spending more than you make, but Canadians consistently do this: in the third quarter of 2011 Albertans had an average of over $33,000 worth of household debt, which doesn't include mortgages. TransUnion, the source of the data, note that Canadian debt stabilized last year after rising for more than six years. But the economy is still too fragile and the decrease was too slight for this to be cause for much optimism.

The Bank of Canada continues to issue warnings about the unstable nature of the finance of Canadians. They further warn that the ratio of household debt to income will continue to rise. That ratio hit 153 per cent in the third quarter of last year, which is disconcerting, especially given the state of the world economy, high housing prices in Canada and an unemployment rate of 7.5 per cent.

The good news for most students is that we're still young enough to recover from our mistakes. Canadians of all types are risking a lot by remaining ignorant about their finances. The irony of the great recession is that because Canada weathered it better than most countries we haven't been forced into frugality. While in this case the truth won't set you free, it will ensure your future is much more comfortable.

end of article

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About Synergy Debt Group
Synergy Debt Group enables consumers caught in the, "Minimum Monthly Payment Trap" to become debt free, providing an alternative to bankruptcy and the damages that come with it.

At Synergy Debt Group, we make it possible for our customers to achieve their financial
goals and gain independence from creditors quickly. If you are serious about getting out
of debt, preserving your credit, and saving money; give Synergy Debt Group a call today for
a free consultation.

Friday, January 20, 2012

Time to keep eye on rising debt, but no time to panic, say economists

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Time to keep eye on rising debt, but no time to panic, say economists

By Julian Beltrame, The Canadian Press | January 19, 2012

Bank of Canada Governor Mark Carney makes his way through an area under construction as he walks to a news conference in Ottawa Wednesday January 18, 2012. Several prominent economists say they think Canadian households may not be as overburdened with debt as conventional wisdom — and the Finance Minister and Bank of Canada governor — have suggested. THE CANADIAN PRESS/Adrian Wyld

OTTAWA - Canadians are already saddled with the highest level of debt in history — and it's rising — but the problem may be exaggerated, some prominent economists say.
Alarms went off again this week after the Bank of Canada warned household debt will likely climb this year from its already all-time high perch of 153 per cent of annual after-tax income, a worrying development since governor Mark Carney started flagging debt when it was approaching 140 per cent.
By the central bank's own projections, Canadian households are inching ever so close to the 160 per cent ceiling hit by American households before the roof caved in on the U.S. economy in 2008.
Carney and Finance Minister Jim Flaherty voiced their concerns, although they held off committing to doing anything about it.
Some analysts have expressed skepticism in the past about the central bank's furrowed brow over household debt, particularly CIBC's Benjamin Tal, who has written often that Canadian homeowners are responsible borrowers and can afford to service their borrowing.
Now two more — TD Bank chief economist Craig Alexander and Derek Holt, vice president of economics for Scotiabank — are raising their voices to try and debunk the theory put forward by Carney and Flaherty.
Yes, Canadians should be careful not to take on too much debt during the current period of low borrowing costs, but the situation has not reached alarming levels, they argue.
The myth of too much debt, they say, is that the data often cited — debt to annual disposable income — is one of the "worst" of available measures for assessing household finances, says Holt.
That's because it is comparing a liability that needs to be paid off over a lifetime to a single year's income, a bit like comparing apples and orange groves.
A better comparison, adds Alexander, would be to pit debt against assets, such a person's home equity, stock investments and other savings. If income is to be the measure, then the important criteria is the cost of servicing the debt annually, not the total debt itself.
"What truly matters is the quality of the assets acquired with the debt and even more importantly the ability of the household to meet their financial commitments," Alexander said.
He gives the example of a couple that takes out a $160,000 mortgage with a combined income of $100,000 a year. The ratio is the scary 160 per cent, but, "It is not evident that household is exposed to major financial risk," he said.
On more relevant metrics, Canadian households are well positioned.
Canadian assets relative to income is at an all-time, they have greater equity in their homes than their American cousins, and their net worth is near the pre-recession peak even though their stock portfolios are not nearly as rich. Home affordability ratios — annual cost of service debt to annual income — are also within historic levels, partly because of low interest rates.
Holt said the litmus test of the financial health of Canadian households is what happens during a shock.
Consider Toronto's 27 per cent house price slide between 1989 and 1996, or the 10 per cent drop in 2008-09. Also the 20 per cent hit in Vancouver home values between 1995 and 1999. In none of those shocks did the delinquency rate for mortgage payments approach one per cent.
By contrast, the U.S. delinquency rate hit as high as nine per cent during the current crisis.
Holt said Canadians may be more vulnerable now, but not by much.
"We have to worry about the sustainability of house price gains, we also have to worry about how much longer housing and consumer spending can contribute to economic growth, what we have less to worry about is that ... we would face a U.S.-style set of problems," said Holt.
"That's where the difference between Canada and the U.S. is night and day."
Alexander estimates a two per cent hike in interest rates would push about 10 per cent of households with debt into uncomfortable territory, where mortgage payments would eat more than 40 per cent of after-tax income.
That's something that should keep vulnerable household's eye on their personal debt curve, he said, but it does not suggest a U.S.-style meltdown is in the offing.
Analysts, including the Bank of Canada, also point out that Canadians are already starting to temper their credit appetite, since the rate of debt accumulation has slowed significantly in the past year. Part of the current climb in debt-to-income ratio is due not to taking on more debt, but to slowing income growth.

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Canadian consumer spending to grow — along with household debt:Conference Board

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Canadian consumer spending to grow — along with household debt:Conference Board

BY KIM COVERT, FINANCIAL POST JANUARY 18, 2012

One big reason why Canadian consumer debt is at record levels is the wide-scale availability of credit cards, which were first introduced in the 1960s.

Photograph by: Reuters, Reuters

OTTAWA — Joe Public can be forgiven for wondering why he should care about Europe's sovereign debt crisis — after all, other than making equity markets see-saw wildly, it seems like a problem for other people far away.
A report released Wednesday by the Conference Board of Canada brings the story closer to home, however, by drawing a direct line between fears of an economic meltdown across the pond and soaring levels of Canadian household debt.
Nervousness about the possibility that sovereign debt contagion in Europe could slow the global economy acts as a rein on business spending, which in turn slows job creation and income growth and will eventually add to household debt levels, writes Pedro Antunes, director, national and provincial forecast, in the board's Winter Outlook.
Canada's employment situation flatlined in 2011 as concern over European debt and market volatility grew, and wages stagnated even as historically low interest rates encouraged households to take on more debt, he said.
Projected modest job growth of 1.6 per cent in 2012, "coupled with unimpressive wage gains, will lead to disappointing growth in household income in 2012 —up just 3.5 per cent," Antunes writes, calculating that after-tax income will grow by just 2.8 per cent this year, less than in 2011 and far below the pre-recession pace of five per cent.
Meanwhile, consumer spending will outpace income growth, the report says, as the housing market remains strong, interest rates remain low and as consumer confidence returns. While the situation is "not yet desperate," Antunes notes the money for all that spending growth will be plastic.
"A much stronger performance is forecast for 2013. Until then, however, households are expected to keep their spending up by falling deeper into debt —a trend motivated by rock-bottom interest rates," he said.
Debt will become a real problem when interest rates increase —a point that has been made numerous times by both Bank of Canada governor Mark Carney and Finance Minister Jim Flaherty.
Delivering his Monetary Policy Report on Wednesday, Carney predicted that the current record level of household debt —Canadians owe $1.54 for every dollar they earn — will only increase, but noted that authorities are working to make sure that "more vulnerable households" are not getting in too deep.
Flaherty, speaking in Gatineau, Que., on Wednesday ahead of a pre-budget consultation via teleconference, said he's "encouraged" by recent moderation in housing prices, and by the fact that Canadians have been paying down their credit card debt.
"We've seen some softening in residential house prices of late. That's desirable," Flaherty said. "I don't anticipate intervening in the residential real estate market in terms of mortgage insurance now. We watch the market. We've intervened three times in the past six years. If it's necessary to intervene again, we will, but I don't see that at this time."
Household debt is a logical outcome a policy of low interest rates, says Douglas Porter, deputy chief economist at BMO Capital Markets.
"Without pounding on a favourite drum, note that the fact that households have become a net borrower of funds (after being a net supplier for decades), is simply a delayed response to persistently low interest rates," Porter wrote in a note Wednesday. "With real rates likely to remain deeply negative for some time yet, don't look for households to suddenly become big net savers anytime soon."
Postmedia News

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