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

Synergy Debt Group

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

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.