Report highlights from ‘The Current State of Canadian Family Finances’

The Vanier Institute of the Family released their annual Current State of Canadian Family Finances report earlier this week.  It is well worth highlighting their important findings:

Unemployment rate misleading:  Considering the ‘hidden unemployed’

The report does an excellent job of illustrating the potential shortcomings of the current method of calculating the unemployment rate.  The current method involves estimating the labour force (those actively looking for jobs) and then comparing it to the total number of employed individuals in the labour force.

The problem of course is that when people give up looking for work or those who have gone back to school full time.  Being involved in the post secondary world, I can tell you that we are busting at the seams with individuals getting second career retraining.  These people are not counted among the workforce despite the fact that they would like to be working.

If the labour force had remained at its October 2008 levels, true unemployment would measure closer to 9% than the current 7.8%.

Yet many of the people who had dropped out of the labour force either due to discouragement or retraining will likely reenter it once they either complete their schooling or sense that the job market is picking back up.

We got an early glimpse of what this does to the unemployment rate a couple weeks ago when Stats Canada reported that a surprising 69,000 new jobs were created in January yet the unemployment rate rose as those entering the workforce increased at a greater rate than the new jobs were created.

The report also discussed what it called the ‘hidden unemployed’: Those who are currently working part time but would like to be working full time hours.  Though they show up in the employment numbers, they mask underlying weakness in the job market.  From the report:

“Between 2008 and 2010, the number of part-time workers working part-time because they could not find full-time work rose by almost 210,000 – from 711,200 in 2008 to 920,000 in 2010. The rate of involuntary part-time work – involuntary part-time work as a share of all part-time work – grew from 22.4% to 27.8% over this period.”

Average debt breaches the six figure mark; Debt-to-income ratio continues to swell

“The average total accumulated debt per Canadian household crept above the $100,000 mark in late 2010. This represents a 78% advance in real terms since 1990 and a 46% hike since 2000.”

I find the real (inflation adjusted) advance in household debt to be most shocking.  Though I have explored this increase before, it nevertheless fails to shock me every time I read it.  One of the interesting things in economics is to look for trends that are clearly unsustainable and then hypothesize on what will spark the mean reversion and what it will look like to the overall economy.  That is the overall purpose of this blog.  If you’re interested in reading more about this, check out the primer on ‘The Great Connection’.

The report suggests that as many as a million families are now at the mercy of interest rates in determining their financial stability.  A rise in interest rates back to their long term averages over the course of several years would put one million families in serious financial distress.

In the meantime, the dead canaries are starting to pile up:

  • In October 2010, some 17,400 mortgages were in arrears by three or more months.  This compares to 11,500 before the recession began. This is an increase of 50%.
  • The 90-day delinquency rate on credit cards increased from 0.88% before the recession to a peak of 1.34% in early 2010, or over 50% higher.   The rate fell to 1.13% in July 2010, still 28% higher than the pre-recessionary level.
  • About 32,300 Canadians became insolvent in the third quarter 2010. This is an improvement from earlier in 2010 but still 12% higher than pre-recession levels.

Consider that all of this is taking place with interest rates still hovering near all-time lows.  Heaven forbid we see a resurgence of inflationary pressures or increased risk premium demanded by the bond market or things will go from precarious to roadkill in roughly 3.4 seconds.

Mortgage debt averages $172,000

When averaged across all households (i.e. those with and those without mortgages), the average household mortgage debt is $63,000.  But remember that housing corrections begin when the margins are squeezed.  If the sub-prime fiasco has taught us anything it is that a real estate free-fall begins when the number of marginal buyers are either exhausted or are stressed in their current financial obligation.   With this in mind it’s worth noting that among those who currently have a mortgage, the average amount is $172,000, with this number being disproportionately swollen among new buyers.

On house prices…

“The increase in housing prices was mostly due to record low interest rates, lower down payment requirements, and longer amortization periods over which to pay back the mortgage. This created increased demand for homes among consumers and has contributed to the makings of a housing price bubble.

As suggested in last year’s report, “the conditions are still in place for a correction in house prices; when and by how much is the difficult question.” The “when” seems to be getting closer and closer or may have already arrived. Over time, the price decline could easily be in the double digit range. It is well to remember that U.S. house prices have fallen by more than one-quarter since 2006. Falling house prices may be good news for new home buyers but will erode the assets and balance sheets of many Canadian homeowners.”

Indeed, when compared to measures of fundamental value, housing looks like one giant, juicy bug lazily meandering along a busy highway.  It’s increasingly likely that it will have an intimate encounter with a windshield.

Ending your week with some comedic entertainment:

What better way to send you into your weekend than with a chuckle. Thanks to the ‘The Whisperer’ for emailing me this gem.

Those who understand cause and effect might manage to force a smile.  To those who don’t, two bits of advice:

1)  Read this

2)  Caveat emptor

Cheers,

Ben

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18 Responses to Report highlights from ‘The Current State of Canadian Family Finances’

  1. TS says:

    Great post on the so called recovered jobs. It appears that Statistics Canada data and press releases are misleading the public. Hmm now why would they do that? I wonder if they play ball with those that would not want the truth coming out that they can keep their jobs.

  2. Mike says:

    ‘Tis the way of the world these days- short term outlooks. I think a column should be added to that advertisement stating the cost of the mortage over the life of the amortization.

    Owning a house is so entrenched in the North America way of life that people are going to cut back on many extras and some necessities until they ultimately can’t make that monthly payment, probably prolonging that bug on the highway longer than most think.

  3. pricedoutfornow says:

    3 reasons NOT to buy a home in 30 days:

    1) Your monthly payments are going to go up a lot once interest rates rise (as they are destined to over the next few years)
    2) You can save up for MORE of a downpayment, thus savings thousands in interest costs over the life of the mortgage
    3) You can afford more home-if you don’t buy now. Once tighter mortgage rules come in, fewer people will be able to get into the market, thus prices will have to come down.
    Seems fairly straightforward to me!

  4. Mango says:

    “nemployment rate misleading: Considering the ‘hidden unemployed’”

    In Canada, many people work for cash that never hit the numbers, it more than offsets.

  5. Mango says:

    Everybody loves a deal!!!

  6. Mango says:

    Mr Mac

    Looks as Metrotown area is booming

  7. Mango says:

    The Omni House people – unreal, how can a home where you pay more upfront and pay it off in a shorter period cost you more?

  8. tw says:

    You should have seen people clamouring for Nortel stock when it got to 120. And the number loading up when it dropped to 100…..and they backed it up when it dropped to 60. Deal of the century at 40. You know the rest of the story

    At least with housing they are “averaging” up, right?

    Just because a crowd is doing something doesn’t mean it’s the right thing to do.

    • Mango says:

      you are only looking from the peak to zero. Homes are not going 0. Maybe you need to focus from 0 to 120. That is where we are are. Henry hindsight is always 20/200

  9. Alex says:

    Horses will run back into a burning barn because it’s all they know. Why are people any different. It took a great depression to shock people out of complacency and it took two generations to forget those lessons, so someone needs to get burned.

    • Mango says:

      Alex people have great jobs and making payments. We don’t have a fire sale here. Check out my videos below, you cut prices and people come right back.

  10. mac says:

    Unless the crowd is Chinese. Population 1 Billion. Remember the boomers? Did they effect house prices? They were a sliver of a boom compared to China. Would all you guys be sitting around in 1964 saying the Beatles are a fad, what influence could they possibly have? And please don’t tell me about Landcor data. Open your eyes. Who lives in Metrotown now… who lived there 25 years ago?

    • Tell us about it Mac. Let’s talk numbers. Dig up some demographic data on house sales to Chinese buyers for me. Dig up the actual numbers on Metrotown. You may hate the Landcor data, but it’s still data, while what you’re presenting is anecdote. You may well be right, but prove it using facts rather than hear-say.

      • Mango says:

        Ben, I have posted Video’s, check out the folks buying, they ain’t from iceland!

        Ben, to go Vancouver and you will feel you have left Canada and are in some burb of China. Chinese are the only people in Vancouver!

  11. mac says:

    They just don’t keep data on race, illegally moved money and money moved between families. But maybe a prolonged visit to Vancouver is in order. In 1982, the Chinese population in Vancouver was 8%. Take a flight. Book accommodation. Go out for dinner on Robson St., in Metrotown, Kerrisdale or Richmond.

    • I have no doubt that there are more minorities in Vancouver than there was in 1982. But the same could also be said for particular parts of Toronto and Montreal. It doesn’t tell the whole story Mac. What is their average wealth or income? Is it sufficient to support single family house prices at $1 million? $2 million? $5 million? What percentage of new purchases are first time purchasers from abroad? All available data suggests that it is still tiny. They may dominate a certain tranch of the market, but it is overwhelmingly likely that the wealthy Asian story does more to lure locals into the game than anything else.

      The lack of data to either prove or disprove the Hot Asian Money story is indeed frustrating, but in the absence of better data, I’d be inclined to build a case around the Landcor data than “go out for dinner on Robson St.” Indeed a dinner out in Riverdale (east Toronto) might well convince you of the huge influx of Chinese wealth into that neighbourhood…..but with house prices about half of those in Vancouver.

      Absent the decisive stats to end this debate, the best we can do is analyze what data we have available to us. I’m sorry to say but the available data casts serious doubt on the sustainability of house prices in Vancouver.

      • Mango says:

        Ben, sometimes graphs/data don’t tell the whole picture. That is saying that if any investor looked at a stock when it was listed, can never imagine it rising…even perhaps it may have been going up 30 years. I think you need to think outside the box and look at the reality and give a little to what is actually on the ground, you are hoping for inflection point of 30% – what data have you used that 70% of today’s world is the fair value? Nobody knows. Right now, we are in a boom, you have to get on the wave, ride it, get rich and move on the next one. Otherwise you will on your 2000 posts with the same graphs that you have been recycling over and over, yet the market continues to go up and up….and all you have is data after data and people who come here and posts support for your work. In fact, you have been WRONG and continue to be WRONG in the face of strong jobs, exports, growth and house prices. I think what Mac is telling you is to really have a hard look in the mirror and ask yourself “With all my data and graphs, why am I wrong?” Look deeper.

        fyi..please don’t edit my post. I am not insulting anyone, just trying to get you to kinda understand that you are really getting nowhere with all this data and new framework is needed.

  12. Mango

    First of all, I have NEVER edited a comment that was not a blatant personal attack on another commenter. Period. In fact I have only ever edited one. It was yours.

    With regards to your comment about the videos, I watched them and I didn’t notice anyone holding briefcases full of cash. There’s no doubt that there is a higher proportion of Asian buyers, but the same can be said of a number of other communities in Canada. How do you know that these people are making their purchases from pre-existing wealth? What makes you convinced that they are not holding mortgages as well and are making local income just like the vast majority of other Vancouverites? This is exactly what I mean. Without the solid data, we are merely speculating that all these people in this line are wealthy foreigners with ample cash, not just more momentum chasers relying on cheap, easy financing and a greater fool to ensure them profit.

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