Krugman on Canadian Household Debt

[Michael Hardner]

NY Times

My trip yesterday was actually to Niagara Falls, to talk to the Canadian Bar Association. In preparation, I did some homework; and to be honest, I came away a little less sanguine about Canada than I started.

Everything I and others have said about the Canadian banking system and its virtues is true. But in other respects, there do seem to be some worrying signs.

Our house price line hasn't dipped like the American one has.

[Bonam]

Our house price line hasn't dipped like the American one has.

Nope our prices are still ridiculously high and completely unaffordable. Ever looked at trying to buy a house in Vancouver?

http://www.ctv.ca/CTVNews/Canada/20100406/vancouver_100406/

According to this recent article, average home prices (excluding nice homes which skew the average to over a million) in Vancouver have risen from 650k to 800k in just the last year.

I don't care whether experts think it's "bad" for some abstract "economy", but what we really need is a price correction that drops these costs to a fraction of what they presently are. That's what would get young families to actually be able to afford a decent life in Vancouver, rather than huddling in tiny apartments or spending 90% of both incomes on mortgage payments.

[dre]

Nope our prices are still ridiculously high and completely unaffordable. Ever looked at trying to buy a house in Vancouver?

http://www.ctv.ca/CTVNews/Canada/20100406/vancouver_100406/

According to this recent article, average home prices (excluding nice homes which skew the average to over a million) in Vancouver have risen from 650k to 800k in just the last year.

I don't care whether experts think it's "bad" for some abstract "economy", but what we really need is a price correction that drops these costs to a fraction of what they presently are. That's what would get young families to actually be able to afford a decent life in Vancouver, rather than huddling in tiny apartments or spending 90% of both incomes on mortgage payments.

The problem is if they allowed that price correction to happen the ownership class (middle class and wealthy) would lose billions and billions of dollars. And they have a disproportionate share of political power so its unlikely the government would ever do that.

Youll notice that most measures taken after the meltdown were actually designed to keep the housing bubble inflated, and stop realestate investors and speculators from losing money. In Canada for example, they intentionally made it harder for young people to buy homes by doubling the ammount of money you need to put down on a CMHC mortgage

Nobody gives a fuck if young families can buy a house or not. The ownership class (and their government) would rather see young families renting houses from them.

[Bonam]

The problem is if they allowed that price correction to happen the ownership class (middle class and wealthy) would lose billions and billions of dollars. And they have a disproportionate share of political power so its unlikely the government would ever do that.

They would lose non-existent dollars. What they have is not dollars, but their houses. If they own and are living in those houses, then they can continue living in them whether their cost rises or falls. In fact, their property taxes would fall, benefiting them if anything. It is only an impact on people who hold houses as investment properties, or who want to use them as collateral for loans.

By the way, it is precisely the middle class which cannot afford these houses. In Vancouver, I know many families with two professional, working, adults, making combined salaries in the range of $100-150k per year, who are unable to afford just normal, average, houses in decent neighborhoods, because such houses cost on the order of $1-1.5 million dollars. Do you know what the monthly payment is on a $1.5 million mortgage?

It is not just the poor that cannot afford these houses in Vancouver, but families solidly in the middle and even upper-middle classes. The situation is, frankly, ridiculous. The problem is with the real estate market in Vancouver: almost anywhere else people earning this amount of money would have large, luxurious, houses (if they wanted them).

Youll notice that most measures taken after the meltdown were actually designed to keep the housing bubble inflated, and stop realestate investors and speculators from losing money. In Canada for example, they intentionally made it harder for young people to buy homes by doubling the ammount of money you need to put down on a CMHC mortgage

Yup, indeed, the whole propping up the crazy bubble knee-jerk reaction was, of course, a mistake.

Nobody gives a fuck if young families can buy a house or not. The ownership class (and their government) would rather see young families renting houses from them.

There's nothing wrong with owners looking out after their own interests. But a market in which professionals that fall well above average incomes are unable to own a decent home is vastly overinflated and unsustainable. Just two and a half hours drive south, in Seattle, housing prices are only a fraction of Vancouver.

[August1991]

NY Times

Our house price line hasn't dipped like the American one has.

So?

This quote from Krugman's line is more disconcerting:

First of all, Canadians borrow and spend like, well, Americans...

I don't think we do.

Historical data will back me up. Canadian banks are different from American banks and I don't quite know why. It's not regulation. Canadian regulations didn't prevent a Confederation Life.

We don't borrow like Americans because our banks don't let us - but regulations don't prevent them. Go figure.

[bush_cheney2004]

...We don't borrow like Americans because our banks don't let us - but regulations don't prevent them. Go figure.

Then how did Canadians come to have the highest rate of personal debt?

Canada ranks first among a list of 20 countries of the Organization for Economic Co-Operation and Development — including the United States — when consumer debt-to-financial-assets ratios are compared. That’s just a taste of the dour revelations in a report released earlier this month by the Certified General Accountants Association of Canada.

http://www.thestar.com/news/insight/article/815836--canadian-debt-the-1-4-trillion-hole-we-re-in?bn=1

[dre]

So?

This quote from Krugman's line is more disconcerting:I don't think we do.

Historical data will back me up. Canadian banks are different from American banks and I don't quite know why. It's not regulation. Canadian regulations didn't prevent a Confederation Life.

We don't borrow like Americans because our banks don't let us - but regulations don't prevent them. Go figure.

I wouldnt be so sure about that. The only reason Canada didnt have the same kind of sub prime meltdown that the US had is because the Federal Government decided to guarantee National Housing Act, Mortgage-Backed Securities. That makes the Canadian Government the largest sub prime lender in the world.

90% of Canadian mortgages are now securitized. In 2007 the Harper government slashed the CMHC rate and extended the amortization period to 40 years. These mortgages are very dangerous instruments and the government found the only way it could sell the securities they were bunded into was by putting Canadian taxpayers on the hook to guarantee them.

This is a potential time bomb.

[Smallc]

90% of Canadian mortgages are now securitized. In 2007 the Harper government slashed the CMHC rate and extended the amortization period to 40 years.

I believe that's been undone now. Our banks will be fine, but Canadians borrow too much.

[August1991]

I wouldnt be so sure about that. The only reason Canada didnt have the same kind of sub prime meltdown that the US had is because the Federal Government decided to guarantee National Housing Act, Mortgage-Backed Securities.

I beg to differ.

dre, I suggest that you read about the history of banking in Canada, and then banking in the US. For an English Canadian nationalist, it will be an eye-opener. I am surprised that Maude Barlow, Pierre Berton or Margaret Atwood never picked up on this. (Banking in Quebec is another story. I won't bore you with details but Quebec popular historians know this distinction well.)

The history of money in Canada is very, very different from the history of money in the US. I am surprised that English Canadians don't know this about their own country.

[dre]

I believe that's been undone now. Our banks will be fine, but Canadians borrow too much.

Yes thats been undone. CMHC amortization was cut back to 35 years and the minimum downpayment was raised 5%, but the mortgages made during that period still exist and theyre still dangerous because the public is holding the bag. The government guaranteed all those MBS's and assumed all the risk.

[dre]

I beg to differ.

dre, I suggest that you read about the history of banking in Canada, and then banking in the US. For an English Canadian nationalist, it will be an eye-opener. I am surprised that Maude Barlow, Pierre Berton or Margaret Atwood never picked up on this. (Banking in Quebec is another story. I won't bore you with details but Quebec popular historians know this distinction well.)

The history of money in Canada is very, very different from the history of money in the US. I am surprised that English Canadians don't know this about their own country.

[

You can beg to differ but what I stated is a fact. Read up on what National Housing Act, Mortgage-Backed Securities are and what the government did to prevent the market for Canadian MBS's from imploding just like the American market did. They guaranteed all the instruments bundled into those securities!!!! Im not sure the gravity of that is quite sinking in here... They signed YOUR name and promised the people buying these securities that if any of the instruments default YOU will cover the cost.

Canada was AWASH in dangerous loans. 40 year mortgages with no money down ROFLMAO.

[August1991]

Canada ranks first among a list of 20 countries of the Organization for Economic Co-Operation and Development — including the United States — when consumer debt-to-financial-assets ratios are compared. That’s just a taste of the dour revelations in a report released earlier this month by the Certified General Accountants Association of Canada.

http://www.thestar.com/news/insight/article/815836--canadian-debt-the-1-4-trillion-hole-we-re-in?bn=1

b_c, gimme a break. You quote the Toronto Star.

Most individual Canadians, French or English, are cautious. If I were American, I'd be more intrigued about profit-seeking Canadian banks. It wasn't government regulation that kept them in check.

----

As I say, look at the history of banking and money in Canada, and then look at its history in the US. For an English Canadian nationalist (or even a Quebec nationalist), there is no better solace - or eye-opener. The difference between the three societies is stark.

Since Watergate, ignorant people repeat the mantra "Follow the money" as a way to find "The Truth". In this case, I have to agree. There's a reason Robert Mundell won a Nobel Prize in Economics.

Follow the money, or maybe the exchange rate.

Edited August 22, 2010 by August1991

[bush_cheney2004]

b_c, gimme a break. You quote the Toronto Star.

Most individual Canadians, French or English, are cautious. If I were American, I'd be more intrigued about profit-seeking Canadian banks. It wasn't government regulation that kept them in check.

...which quotes another credible Canadian source. Canadians are racking up personal debt at record levels. Not my numbers....they are yours. Charge it.....

[Michael Hardner]

...which quotes another credible Canadian source. Canadians are racking up personal debt at record levels. Not my numbers....they are yours. Charge it.....

Auguste, you seem to be speaking more about traditional Canadian attitudes around debt, whereas Krugman (and apparently B_C) are showing numbers to show that that may in fact be changing.

[msj]

Those attitudes aren't changing. They have changed.

Household debt in Canada reached a record $1.41-trillion in December. If that was spread among all Canadians, each person would carry more than $41,740 in outstanding debt – an amount 2.5 times greater than 1989 after adjusting for inflation and population growth, according to a report by the Certified General Accountants Association of Canada.

And Canadians are okay with taking on still more debt. Nearly 60 per cent of respondents whose debt had increased through the recession – and 92 per cent whose debt decreased or stayed the same – still felt they could either manage it well or take on more debt.

Then one can look at the facts with more detail.

One will find that Canadians had a higher debt-to-income ratio than Americans (although lower than some other OECD countries) and had the #1 (as in highest) ratio of consumer debt to income for 20 advanced OECD countries (the US coming at 4th place and about ~25% below Canada).

And those numbers are based on 2008. Canada has had a lower savings rate than the US during 2009 and 2010 so I expect the numbers to be worse now.

So much for the Canadian attitude theory.

But it seems that some here like to ignore the facts again and again.

That's what ideologues do when the facts don't agree with their prejudices.

-----------------

The thing I find so funny is the BS about Canadian banks and Canadian attitudes.

The facts can stare people in the face and they will still ignore them - Canadians as heavily indebted (and sometimes more indebted) than Americans, Canadian house prices higher than average family income compared to the peak in the US, Canadian monthly rents indicating house prices are over valued etc...

The key, though, is unemployment. If China slows and takes commodities with them then we will see an unemployment rate of 9.5% or more in Canada.

For Canada, this would be the straw to break the camel's back. Deleveraging would come to Canada with a vengeance and then we would all be Japanese (since Americans are finding out that they are Japanese, too).

[Shady]

Then how did Canadians come to have the highest rate of personal debt?

By not defaulting on their mortgages and credit cards like in several other countires.

Anyways, does anyone listen to Paul Krugman anymore? This so-called economist continues to claim there's no problem with social security. Even though the program now takes in less money than it pays out.

[msj]

Anyways, does anyone listen to Paul Krugman anymore?

If people listened to Krugman in the first place then the US wouldn't be in the shambles that it is in.

Of course, one would have to actually read Krugman on a regular basis to see why this is....

I always find it amusing when people criticize someone based on how many people listen to them....

(edited for going off topic)

Edited August 23, 2010 by msj

[season331]

A large part of the federal debt is held by other government branches, such as the Fed, Social Security etc. The number that is relevant in this context is the federal debt held by the public. This number against the GDP is estimated to reach 68% in 2019, up from the current 54%, according to the nonpartisan Congressional Budget Office.

Some economists, like Krugman, see the federal debt as relatively benign, arguing that the government is still able to borrow at historic low interest rates of 3.5%, indicating that the financial markets are not worried about the solvency of the US government. Krugman compares the US debt against Belgium and Italy in the 1990 with a net debt to GDP ratio of 118% and 114% respectively, without going through a financial crisis.

Other economists, like Greenspan, consider the increasing levels of debt "very dangerous", creating further downward pressure on the US$, higher interest rates, and a considerable risk of high inflation, not because the economy cannot manage higher levels of debt, but because of Congress trying to prevent the Fed from reducing the monetary stimulus when it becomes necessary.

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[Pliny]

A large part of the federal debt is held by other government branches, such as the Fed, Social Security etc.

The "Fed" is not a government branch.

[Pliny]

If people listened to Krugman in the first place then the US wouldn't be in the shambles that it is in.

The US wouldn't exist if they listened to Krugman.

And I do read Krugman occasionally for a laugh.

[msj]

Canadian banks would never do anything stupid like those American banks, right?

Wrong. Wrong again. And again.

[August1991]

The thing I find so funny is the BS about Canadian banks and Canadian attitudes.

Well msj, I suggest that you read about the banking and monetary history of the two countries. As I say, it's an eye-opener. I suppose you could start with the Lefttist Canadian John Kenneth Galbraith's History of Money. It's an amazing and delightful read. A Scot protestant born in Canada analyses America's 19th century banking system: practical moralism ensues.

As I say msj, this is an old story. For almost two centuries, Americans and American banks have gone boom/bust while we northern North Americans have looked on in curiousity.

And as I said also above, it's no wonder that Mundell won a Nobel Prize for exchange rate theory.

----

Sorry for the "as I say" and the "I told you so". Usually I'm wrong. So, let me enjoy this moment when I'm right.

Edited September 10, 2010 by August1991

[Pliny]

Canadian banks would never do anything stupid like those American banks, right?

Hardly a comparative risk to the CRA backed NINJA loans American Mortgage Companies were offering and selling to large banks, Wall street and Fannie Mae and Freddie Mac.

These banks are offering and holding the mortgage based upon their own first hand risk assessments of qualified homebuyers.

Are you an accountant?

[August1991]

Canadian banks would never do anything stupid like those American banks, right?

Wrong. Wrong again. And again.

These examples are weak to meaningless.

The far better example is Confederation Life. That was a failure of our supposed superior regulatory system, and, well, English Canadian conservatism.

Confederation Life was an aberration, showing only that Canada's banking system works not because of regulation, but because of Canadians.

Edited September 10, 2010 by August1991

[Pliny]

Well msj, I suggest that you read about the banking and monetary history of the two countries. As I say, it's an eye-opener. I suppose you could start with the Lefttist Canadian John Kenneth Galbraith's History of Money. It's an amazing and delightful read. A Scot protestant born in Canada analyses America's 19th century banking system: practical moralism ensues.

As I say msj, this is an old story. For almost two centuries, Americans and American banks have gone boom/bust while we northern North Americans have looked on in curiousity.

And as I said also above, it's no wonder that Mundell won a Nobel Prize for exchange rate theory.

----

Sorry for the "as I say" and the "I told you so". Usually I'm wrong. So, let me enjoy this moment when I'm right.

Did we look on in curiosity during the thirties?

I don't think there were enough Canadians around that had bank accounts in the nineteenth century for it to matter, were there? And we really only existed from 1867 on. I suppose I should read the book as well - might help, do ya think?

Right now I am reading "Democracy: the God that Failed" by Hans Hermann-Hoppe. Apparently, all European Monarchies were neutered during WW I save for Yugoslavia. It seems that way. Bye-Bye Kaiser Wilhelm, Tsar Nicholas, the monarchies in the Netherlands, Greece, Turkey, Spain, the Monarchs of Italy, etc. Of course, France and Switzerland had already done away with Monarchies and England had a parliamentary form of government already. Switzerland established the ir cantons in the 1200s, I believe and France in 1893 dumped Louis XVI, with a slight reversion in the early to mid 1800's, when the Bourbons ruled. Napoleon III was elected to replace the Royalty.

WW I was probably the first political ideological war and it established the democratic-republican style of government in just about all of western civilization. Woodrow Wilson made good on his claim to make the world safe for democracy.

Probably a little known fact to most of the general public.

The question is did the Monarchs desire that and perhaps distance or insulate themselves from the public on purpose? I note for the most part royal families still live in luxury. Of course, and unfortunately, the Tsar and the Kaiser weren't willing to go along with the plan. They were the stubborn cousins of King George.

Does that have anything to do with Krugman or Canadian household debt? Sorry, guess not, but it is interesting.