Changing social trends in the news…

‘The times they are a changin’

One of the topics that greatly interests me is the change in societal attitudes and norms, and how these affect the broader economy.

Let me give you one simple example.  Consider that household debt has expanded way beyond income growth and inflation over the past 10 years.  It currently sits at just under 150% of disposable income.  Now can that growth last forever?  Clearly not.  So what will that change look like?  How will it affect our economy?  What might trigger this secular shift?  These are the questions that fascinate me.

I’m going to restate some of the major secular shifts that I think are set to reshape the economic and social landscape over the next few years and then connect them to what is happening in the news.

1)  Public sector pension woes

Defined benefit pension are based on ponzi dynamics to begin with.  They work brilliantly when the total returns from the fund’s assets produce enough capital to pay out high entitlements in perpetuity or when demographics are on the side of the pension plan and a proportionally growing base of contributors ensures that entitlements can be met.

But when those two factors are not in play, defined benefit pension plans run into major problems.

Our current low interest rate environment puts tremendous drag on plans that typically discount future liabilities by 6-8% (meaning they expect their pension assets to return that much).  Hitting these targets becomes extremely challenging when over 40% of the assets are in fixed income investments which perform well during falling rate environments, but poorly when rates rise….as they now must.

Also consider shrinking sectors like education where demographics ensure a smaller working base to support entitlements.  Given the low current birth rate and immigration rate as well as higher life expectancy of retirees, it poses major problems to continued solvency of certain plans.  We know the proportion of working educators to retired educators is shrinking.  In the case of Ontario teachers, the ratio was 10 to 1 in 1970, 4 to 1 in 1990, and 1.5 to 1 today.

So for young Ontario teachers hoping to retire at 55 with a 65K/year indexed pension……forget about it!  It’s a pipe dream.  Some simple common sense should tell you that a system is unsustainable when it requires that you work for 30 years and then collect generous, indexed pension benefits equal to the salary of a year 7 or 8 teacher for the next 35 years, especially when the ratio of new teachers supporting the old ones will reach 1 to 1 before too long.  Come on!

It’s not just Ontario teachers.  It’s also federal civil servant pensions and post secondary pensions, like mine.  None of them are sustainable….which means that stories like these should be increasingly commonplace:

Universities facing service cuts to climb out of pension abyss

“Canadian university pension plans have fallen into a collective $2.6-billion hole, and may have no choice but to cut services to begin climbing back out of it.”

“Most faculty and staff have defined benefit pensions, which promise a set retirement income based on service and salary. But those funds suddenly cratered when markets crashed in 2008, most losing 15 to 30 per cent of their value.”

“…cuts are likely unavoidable….“The only place that [money] could come from is our operating budget.”

So students are set to get screwed.  Lovely.  As so often seems to be the case, the burden to rectify these shortfalls seems to fall squarely on the shoulders of those who stand to gain little benefit from them.

Given enough time and enough media attention, public sentiment will turn against them.  It may take a full decade, but I fully expect to see every defined benefit contribution plan become defined contribution.  If you’re young and are part of a DB plan and are not familiar with DC plans, you may want to familiarize yourself.  It will quite likely be your future.

2)  Consumer frugality….less debt, more savings

It’s really a no-brainer that debt has to be paid down at some point and that savings cannot sit at these absurdly low levels forever.   Have a look at household debt (left) and savings rates (left).

The funny thing about sheeple is that they can be counted on to make the worst possible financial decisions until they are scared into being prudent.  I’d suggest that the reality check is coming in the form of falling home prices and rising unemployment.  Regardless of what causes it, these trends won’t continue indefinitely.  The particularly concerning part is that mass psychology ensures that most people pile onto trends en masse.  This is troubling for the economy as a wholesale repudiation of credit and embracing of savings spells deflation.

Yesterday, courtesy of a TransUnion report,  we found out that there the average credit-active Canadian consumer carries a debt load of $25,168, excluding mortgage debt.  Yikes.

The report did highlight that while the debt loads of Canadians is still rising, it is doing so at a much slower rate that in the past few quarters.  Gee, what a relief!

“Overall debt has continued to grow (4.3 percent year over year), but at a slower, single digit rate in the last three quarters.”

Confirming this report, Stats Canada today released their updated bank credit stats.

While they calculated that total household credit advanced at a wholly unsustainable 7.1% year-over-year clip in November, easily outpacing inflation and income growth, there were some interesting developments in the mortgage arena.

Notice that while total consumer credit advanced during the month at a 7.2% clip, it was offset by a decline in total mortgage credit.  Now one month doesn’t make a trend, but it does make you take notice.  Given that expanding mortgage credit and the associated wealth effect of rising home prices is what spurs consumer credit growth, a sustained drop in mortgage demand and home prices by association spells big trouble for consumer credit demand.  Keep an eye on this one!

3)  Renting back in style….McMansion lose their appeal

We’re a long ways from experiencing this here in Canada, but it will come.  As we look south of the border where the “real estate only goes up” illusion has been thoroughly thrashed, we find that indeed a mean reversal is underway:

Rich Americans ditch home ownership for renting

I don’t think we’ll see quite this same love of renting from affluent Canadians, but it does foreshadow a coming shift in our perceptions of the merits of buying vs. renting.

Is the McMansion Era gone for good?

Also a great read.  I firmly believe that we will see a similar movement here in Canada.  McMansions are finished.  To quote the teeny-bopper crowd…..”they are like… last year!”


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6 Responses to Changing social trends in the news…

  1. Retired in Victoria BC says:

    Regarding “Housing Bubble of December 1, 2010”, I agree that measures of fundamental value market never change and apply to all locations. I kept the following UK article written in 1990 because of the insightful remarks and the fall in Canadian real estate values in 1993 to 1994. The special feature of this cycle is that political economic manipulation, in various forms, has prolonged this bubble whereas in the early 1980’s there were soaring interest rates.

    Banker’s Institute Journal 1990
    P Foley, Economic Advisor of a UK BANK

    The market for housing is quite unlike any other….many sellers would prefers take their house off the market rather than lower the price….the result is that initial evidence in any downturn is a sharp reduction in the volume of house sales rather than a fall in prices. ….; major agency chains report that the volume of house sales has fallen by roughly 50 per cent in the last year. However, prices remain around 10% up on a year ago
    What happens next in the housing cycle? When all those who are reluctant to reduce prices have dropped out of the market, there remain those who are more desperate to sell, perhaps because their mortgage commitments have become too onerous, or because they are forced to sell by a job move. This group will be more willing to cut their price, and the consequence is prices will fall… But it should be noted that because of the sharp drop in house sales, those that do take place become less representative as a picture of the underlying demand for, and supply of, housing and may tend to overstate the weakness of the market…. month to month changes tend to be misleading … look at changes since the same period of the previous year………….Prices are slow to react; house price inflation sometimes accelerates further after the initial volume fall. But within two years of sales decline, price inflation has dropped significantly. Obviously each cycle has its own special features, reflecting developments in the wider economy.

    The interest rate policy in the UK in 1990 was “partly driven to by the aim of cutting homeowner’s perceived wealth and power”.

  2. mac says:

    Where are the desperate sellers in London? It’s been 3 years since the “crash” began and those arrows look distinctively like they are pointing up:

  3. John in Ottawa says:

    An interesting story this week from the AP.

    NEW YORK (AP) — More than 8 million [US] consumers stopped using credit cards over the past year. The decline stems from a combination of consumer choices and bank actions.

    An analysis by credit reporting agency TransUnion found that use of general purpose credit cards bearing MasterCard or Visa logos, or issued by Discover or American Express, fell more than 11 percent in the third quarter, compared with the July to September period last year.

    About 62 million people now have an active card, compared with 70 million a year ago.

    The Chicago company found that consumers in the subprime category, or those with low credit ratings, were believed to be without cards mostly because they were shut down by banks after payments fell behind or balances were written off.

    “One can quite reasonably infer that’s not voluntary,” said Ezra Becker, vice president of research and consulting in TransUnion’s financial services business unit. Banks have written off record amounts of credit card balances in recent years.

    But a significant portion of the decrease in card usage reflects decisions by cardholders to stop using credit, Becker said. “They’re simply either not purchasing as much or paying down balances.”

    Remember that defaults and paying down debt both contribute to the statistic of a “higher savings rate.” Savings is not just socking money away in the cookie jar.

    Any near term increase in the savings rate in Canada should first be looked at as consumer distress, not as having more money than we can spend.

  4. mac says:

    Yeah. I do. But can you read? I’m talking about London. Just focus on London and you’ll have to do a bit more clicking that reading the overall house price graph. As someone who is certain of Vancouver’s future, I advise you to look at London and not at Norfolk, Worcester and Lancaster.

  5. Pingback: BMO weighs in on troubling RSP trends and public sector unions | Financial Insights

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