Friday, December 10, 2010

I am worried..

Lets put housing aside for a minute and lets look around us.

Everyone from the B of C to Bank economists have been sounding the alarm over the huge level of household debt. This debt is mostly related to inflated RE, either directly to purchase it, or to extract equity out of it for other expenditures.

Things could go sour very quickly.. and when they do it is VERY difficult to get out of the debt-death spiral. The US is dealing with a catastrophic situation, and if it gets any worse I worry about their civil society.

Alarmist talk?

How about 15 Million unemployed, and another 11 under-employed (ie moved from full-time to part-time).

How about 43 Million on food stamps - in the wealthiest economy in the world!

Hopefully we have seen some sort of bottom, but that bottom is a long way down from where we are.

Are we so insulated from our largest trading partner's fate? We were, we had solid banking practices, higher savings rate and lower debt. But the last few years were like Canada-gone-wild. We did exactly what the US did.

The best way to prevent a calamitous RE bubble bursting is to prevent it from happening in the first place! Forget Vancouver, even places like Saskatoon and Calgary had huge price rises even though there is huge swaths of flat land around them. Kinda reminds me of Vegas.

in case we think we are immune, here's what Stephen Jarislowsky said in a Globe and Mail interview, and he is a very wise head in the investing world:

Canada’s banks got high marks from the International Monetary Fund for escaping much of the carnage that ravaged U.S. and European financial institutions in the wake of the global financial crisis. Have they done enough to leverage that position?

Yes and no, but here’s the thing: In Canada the hardship still lies ahead. Our houses are still 20 to 30 per cent above normal levels, salaries are shrinking and a lot of Canadians are heavily indebted. There’s a lurking disaster, to the extent that you have reduction of purchasing power and we are just not saving hardly anything as a nation.

That’s pretty bearish.

I think things are going to get a hell of a lot worse. We still have a trade deficit today despite the fact that commodity prices are incredibly high.

I hope I’m wrong but I think Canada is on the edge of a lot of trouble.


BTW- hat tip to this site which I am adding to my blog list.


  1. I'm with you, Fish. We didn't "escape" the crisis, we just piled so much more debt on that we could pretend we did. When you look at any one measure or category of debt in isolation, Canada looks high but not terribly so, but we are high EVERYWHERE! Personal, federal, provincial, municipal, corporate, unfunded liabilities (which are a debt!), cleverly shuffled-off-the-books debt, etc.
    All of them high, making our total indebtedness among the worst in the world. Worse than Greece!

  2. The problem is not necessarily overall debt, but rather excessive debt and risk is concentrated in the wrong hands. People are retiring with debt. That strikes me as insane. Some families making less than $150k have over half a million dollars in debt. Also insane. It's almost entirely due to housing, and we have newspapers blaring "no housing bubble" and we have "Carney's put", which has made a fool out of anyone looking at fundamental valuations.

    There's not much more anyone can do now. Interest rates at 1%, all levels of government have busted budgets, home ownership rate and prices at new all time highs... We doubled down on a bubble and now we get a bigger bust. What else would you expect?

  3. "Some families making less than $150k have over half a million dollars in debt"

    I wish! I know a guy who has nearly $700k in mortgage debt (rental properties plus principal residence). His salary? $55k. I just have to shake my head. And unfortunately he's not the only one either.

    You've got it right, Fish. I've been warning people for a couple years about debt, rising interest rates etc. Nobody listens to me. I work in the financial industry. My younger clients look at me like I'm delusional. They tell me "But real estate always goes up!" The older clients (70 years plus) know exactly what I'm worried about. They've seen this all before and are just waiting for it to hit Canada.