Canadian dream is alive for the wealthy class

Canadians take on more debt but their indebtedness decreases

Q: How to find a day care that doesn’t cost as much as your mortgage?
A: Get a bigger mortgage

New stats were released by StatsCan today. Depending on you how you want to look at it but people have been finding both positive and negative aspects in it.

On absolute basis, household debt increased.

Total household credit market debt (consumer credit, and mortgage and non-mortgage loans) reached $2,004 billion at the end of the third quarter. Consumer credit was $590 billion, while mortgage debt stood at $1,312 billion. The share of mortgage liabilities to total credit market debt edged up from 65.1% in the second quarter to 65.5%.
Household credit market debt to adjusted disposable income (excluding pension entitlements) edged up from 166.4% in the second quarter to 166.9%. In other words, there was $1.67 in credit market debt for every dollar of disposable income.
Ratio of credit market debt to disposable income

The increase is mainly result of increase in mortgage liabilities. On the flip side, the value of the value of assets held be households has been increasing at a higher rate. As such, when comparing indebtedness to total assets, the ratio has actually gone down.

Household sector net worth at market value rose 2.5% in the third quarter to $10,133 billion. On a per capita basis, household net worth was $278,200. The leading contributor to the rising net worth was a 3.2% increase in financial assets as the value of investment fund shares, particularly mutual fund units, life insurance and pension assets, benefited from stronger domestic and foreign securities markets. Non-financial assets grew 1.2%, mainly real estate assets.
Leverage as measured by the ratio of household debt to assets edged down from 16.9% in the second quarter to 16.7%.
Household sector leverage indicator: Debt to total assets

So putting all of it together

Needless to mention, that aforementioned is an aggregate measure and would be hiding certain segments of Canadians who will be stressed out by high leverage but on overall level, it is business as usual if it is not worse.

So if you didn’t worry when earlier data came out and I wrote Worry about Canadian real estate but don’t lose sleep over it — CMHC then I don’t think there is anything to worry about here.

True in US Fed has increased rate but that increased rate is token 0.25% and BoC is not expected to follow suit. So Canada has a lot of buffer before we start worrying about increasing interest rates leading to a bursting of real estate bubble which I already discussed in Predicting Minsky moment for Canadian housing is moot exercise.

And Canadians are pretty judicious about paying their bills. So much so that US investors can’t have enough of Canadian debt

Credit-card debt of prudent Canadians finds eager U.S. buyers
What makes the debt attractive to U.S. investors is that Canadian consumers are more likely to pay off their bills in full every month than their American counterparts. In the third quarter, the average monthly payment rate for Canadians was 47 percent, versus 29 percent for Americans, according to Fitch Ratings. A similar payment gap has been in evidence for since 2012, even as the rates climbed in both nations from crisis lows.
To be sure, credit-card backed securities, being unsecured by collateral, are only worthwhile as long as the customers keep the checks coming, and even cautious Canadians have taken on historically high levels of debt, exceeding the country’s gross domestic product for the first time. Bank of Canada Governor Stephen Poloz has warned that high levels of debt could magnify any economic shocks, and Finance Minister Bill Morneau has introduced a number of mortgage rule changes designed to cool the nation’s red-hot housing market.
Yet even as Canadians take on bigger mortgages, there’s no evidence that it’s affecting their ability to pay down their credit-card bills. That creditworthiness will keep their debt in demand by American investors, and the U.S.’s lower borrowing costs will keep Canadian banks heading south to sell it.

But I want to discuss something else here: How the rising real estate prices will play havoc with Canada’s social fabric? I kind of hinted at it here Can rising real estate prices lead to rise of alt-right in Canada? but recently I came across a few articles that I thought are worth sharing.

Soaring House Prices Could Mean A New Kind Of Aristocracy: Economists
“The bar is being raised further and further,” he said in an interview. “At these prices [the housing market] is only open to people who have generational wealth.”
He says there is a risk that home prices will continue to rise until it’s not even possible for most people to save up for a down payment. If trends don’t change soon, that could be the case in Toronto and Vancouver. It now takes twice as much time to save up for a down payment in those cities, compared to their average since 2000.
“Parents will only be able to help if they themselves are wealthy homeowners, so you could have a landed wealth-owning class perpetuating through the generations. At that point being born into the right family matters a lot,” Rashbrooke said in an email to The Huffington Post Canada.
Soaring house prices have led to a “massive misallocation of resources,” Eaqub said. As more and more money is concentrated in the residential real estate market, it leaves less money flowing around for other kinds of investment.
In Canada in recent years, housing investment soared while business investment plunged off a cliff after oil prices fell…. mortgage lending went from being less than eight per cent of bank assets in the early 1970s, to more than 40 per cent today.

This is exactly what I pointed out in For Canadian GTA and GVA residents, the American Dream is dead.

Solution usually pitched by experts is to make renting attractive or at least remove stigma from renting. I grew up in a rented apartment so I don’t mind living in a rented space with my family. But Canadians have one of the highest home ownership rates in the world and hence look down upon renting. What we need is an decent quality rental product but land prices are so high, it only makes sense for builders to build high end rental products and we are back to square one.

Builders flock to high-end rental development
In the past two or three years, executives for Minto, the Ottawa-based apartment developer, have spotted an opening in a market that had seemed all but moribund for years, even decades.
Those opportunities, as it turns out, were hiding in plain view, in the form of the sprawling open spaces at the bases of some of Toronto’s 1960s-vintage apartment towers.
Martin Tovey, a Minto vice-president, points to an infill project in Don Mills that’s on the verge of securing council approval –200 stacked townhouses, to be situated on the largely unused grounds of a three-building apartment tower complex at York Mills and Leslie. Minto purchased the properties a few years ago.
The spacious, newly-built units — each over 1,100 sq.-ft — will come in two- and three-bedroom versions. They’re close to schools, parks, transit and shopping.
And this twist: they’re rentals that will lease for about $2,000 a month.

This gentrification of neighbourhood can also impact schooling as it is affecting in Washington, DC.

How exclusionary zoning limits poor families’ access to good schools
….wealthy neighborhoods around the US ban rentals, multifamily housing, and smaller homes through regulations like zoning. This excludes lower-income families by outlawing housing they could afford.
Because school attendance zones tend to follow neighborhood boundaries, exclusive neighborhoods have spawned increasingly economically segregated schools.
The average low-income student lives near a school that scores at the 42nd percentile on state exams, while the average middle-to-high-income student lives near a school scores almost 20 percentage points higher.
Part of the reason: housing costs are almost two-and-a-half times higher near high-scoring schools. Home values are $205,000 higher in the better-scoring areas, the typical home has 1.5 more rooms, and the share of rentals is 30 percentage points lower.
The Price of Australia’s Real Estate Boom
Australia is entering the third decade of a real estate boom that has altered the national psyche. Over the past 30 years, housing prices have risen 7.25 percent a year, leaving the country with some of the most expensive real estate in the world. In the third quarter of this year, real estate prices in major cities rose 11.2 percent on an annualized basis, dashing some experts’ predictions that they were starting to taper.
The rising property values of the last 30 years extinguished economic diversity in Balmain, which is now filled with Sydney’s elite: lawyers, doctors and bankers who built or bought spectacular houses with views over one of the world’s great harbors. The old power station may be converted into offices for Google.
Australia’s broad welfare system and high taxes ensure that those who don’t own homes have decent medical care and access to state-run schools and colleges. Few homeless people are visible on the streets. Following and predicting interest rates have become the national pastime.
Among the 48 percent of Australians who don’t own homes, women over 50 years old are the most vulnerable. When the researchers Susan Thompson and Peter Phibbs interviewed renters for a study a few years ago, they found the cost of property was contributing to malnutrition.
Elderly women, who are more likely to rent because lower wages meant they couldn’t save as much as men throughout their lives, were paying their landlords first and utilities second and buying food last. “They were eating slices of white bread with all they could find on the last few days before pension day,” Mr. Phibbs said to me this month. “That’s depressing in a rich society.”