Statistics Canada reported today that Canadians' net worth and household debt both increased in the third quarter of the year. Good news/bad news story, then?
Not really. The rise in net worth is an all-boats-rise-with-the-tide kind of event. The main (if not only) contributors to the improvement in the asset side of household balance sheets are the continuing gains in home prices and the weakness in the exchange rate, which has the effect of boosting the C$ value of Canadians' foreign assets. Higher savings? Not so much.
Meanwhile, on the debt front, Canadians continue to prove that if you shovel cheap money at people, as the Bank of Canada has been doing for the last half-decade, they'll take it. The household debt/disposable income ratio is now just a touch shy of 163%, a number scarily close to what was observed in the US just before the financial crisis.
Just about everyone, from the Bank of Canada to the lowliest blogger, is hoping that the rise in interest rates, when it eventually comes, will be gradual enough to ensure that house prices have a "soft landing". Maybe they will, but consider the balance sheet impact of even that benign scenario.
The dollar figure for household wealth, at $232,000, may sound impressive, but consider that the average house price in Canada is about $414,000 -- and is much higher than that in cities like Vancouver and Toronto. Many households have virtually no assets other than the house itself, and they're carrying a good chunk of mortgage debt. That debt won't decline if higher rates cause house prices to slip -- it will just become harder to carry. But the fall in prices will tear a big hole in homeowners' equity, and hence in that oh-so-comforting net worth number.
Local TV advertising here can be a pretty distasteful mix, replete with ambulance-chasing lawyers and cheap appliance dealers. There are also lots of ads that speak to the desperate state of household finances: jewellers offering to buy your gold and silver, and people urging you to borrow against the equity in your home ("put your home to work", as one company puts it), or, if you're an indebted senior, extolling the virtues of a reverse mortgage. The Bank of Canada may be trying to get people to act more cautiously, but there are few signs that anybody's paying heed.
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