May 1, 2018

Bank of Canada Governor Stephen Poloz gave a speech today titled Canada’s Economy and Household Debt: How Big Is the Problem?:

But the Bank is also focused on the vulnerability of our economy to rising interest rates, given high household debt. There is little doubt that the economy is more sensitive to higher interest rates today than it was in the past, and that global and domestic interest rates are on the rise.

So, today I want to talk about household debt in Canada—the dynamics that led to its buildup, how big a problem it is for Canadians now, and how we can manage the risks in the years ahead.

In other words, the average Canadian owes about $1.70 for every dollar of income he or she earns per year, after taxes.

That ratio is a Canadian record, and up from about 100 per cent 20 years ago. Although this ratio is on the high side, other economies such as Sweden, Norway and Australia have even more household debt relative to disposable income.

If fiscal policy takes the lead in stimulating the economy, this can result in a buildup of government debt. If monetary policy takes the lead, this brings about a buildup in household debt. In both cases, stimulus leads to a buildup of debt over time, whether public or private. And excessive debt levels create a vulnerability, making the economy less resilient to future shocks.

Canadians, regardless of their age group, are increasingly relying on mortgages. Among people under 35 years old, the percentage of homeowners with a mortgage has edged higher from about 85 per cent in 1999 to 90 per cent in 2016. For people in the 55 to 64 age bracket, the increase was more dramatic—from 34 per cent to 46 per cent. This casts a new light on that 170 per cent debt-to-income ratio I cited before.

about 8 per cent of indebted households owe 350 per cent or more of their gross income, representing a bit more than 20 per cent of total household debt. These are the people who would be most affected by an increase in interest rates. We are closely watching the vulnerability represented by this group and the debt they carry, and how it poses a risk to both the financial system and the economy.

In our Monetary Policy Report (MPR) last month, we published our latest estimate of Canada’s neutral rate, saying it falls in a range between 2.50 and 3.50 per cent, assuming that all shocks affecting the economy have dissipated. At 1.25 per cent, our current policy rate is still well below our estimate of the neutral rate.

At the Bank of Canada, we have been watching these debt levels closely because of the growing risks they pose to financial stability and the economy. We know that a portion of Canadian households are carrying large debts, and the concern will become larger for them as interest rates rise. Of course, higher interest rates would likely reflect an economy that is on even more solid ground and less prone to a major economic setback. Furthermore, our financial system is resilient, and the new mortgage rules mean that it is becoming progressively more so. Even so, our economy is at risk should there be an unexpected increase in bond yields or a global slowdown, because both effects would be magnified by their interaction with high household debt.

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)
Median
YTW
Median
Average
Trading
Value
Median
Mod Dur
(YTW)
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 -0.4800 % 2,920.6
FixedFloater 0.00 % 0.00 % 0 0.00 0 -0.4800 % 5,359.1
Floater 3.43 % 3.66 % 88,300 18.16 4 -0.4800 % 3,088.5
OpRet 0.00 % 0.00 % 0 0.00 0 -0.0555 % 3,149.7
SplitShare 4.61 % 4.83 % 77,029 5.06 5 -0.0555 % 3,761.4
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0555 % 2,934.8
Perpetual-Premium 5.62 % -9.65 % 76,162 0.09 10 0.0828 % 2,870.2
Perpetual-Discount 5.41 % 5.45 % 67,074 14.74 24 -0.0556 % 2,938.5
FixedReset 4.31 % 4.71 % 169,211 5.70 103 0.4217 % 2,521.6
Deemed-Retractible 5.15 % 5.63 % 86,590 5.62 27 -0.0686 % 2,936.8
FloatingReset 3.10 % 3.42 % 32,631 3.58 8 0.0749 % 2,764.7
Performance Highlights
Issue Index Change Notes
MFC.PR.M FixedReset -1.42 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.85
Bid-YTW : 6.01 %
BAM.PF.G FixedReset 1.01 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-05-01
Maturity Price : 23.16
Evaluated at bid price : 24.09
Bid-YTW : 5.08 %
BAM.PF.B FixedReset 1.03 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-05-01
Maturity Price : 22.95
Evaluated at bid price : 23.53
Bid-YTW : 5.03 %
BAM.PR.R FixedReset 1.15 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-05-01
Maturity Price : 20.28
Evaluated at bid price : 20.28
Bid-YTW : 5.18 %
BMO.PR.Y FixedReset 1.16 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-05-01
Maturity Price : 23.27
Evaluated at bid price : 24.40
Bid-YTW : 4.75 %
GWO.PR.N FixedReset 1.24 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 18.83
Bid-YTW : 7.70 %
BAM.PF.E FixedReset 1.31 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-05-01
Maturity Price : 22.88
Evaluated at bid price : 23.23
Bid-YTW : 5.02 %
BAM.PR.T FixedReset 1.33 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-05-01
Maturity Price : 20.62
Evaluated at bid price : 20.62
Bid-YTW : 5.16 %
BAM.PR.Z FixedReset 1.57 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-05-01
Maturity Price : 23.02
Evaluated at bid price : 24.55
Bid-YTW : 5.03 %
BAM.PF.F FixedReset 1.62 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-05-01
Maturity Price : 24.16
Evaluated at bid price : 24.52
Bid-YTW : 5.07 %
BAM.PR.X FixedReset 1.68 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-05-01
Maturity Price : 18.15
Evaluated at bid price : 18.15
Bid-YTW : 5.06 %
BAM.PF.A FixedReset 1.79 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-05-01
Maturity Price : 23.66
Evaluated at bid price : 24.43
Bid-YTW : 5.13 %
Volume Highlights
Issue Index Shares
Traded
Notes
NA.PR.A FixedReset 313,090 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2021-08-15
Maturity Price : 25.00
Evaluated at bid price : 26.06
Bid-YTW : 3.97 %
RY.PR.R FixedReset 252,100 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2021-08-24
Maturity Price : 25.00
Evaluated at bid price : 26.37
Bid-YTW : 3.64 %
RY.PR.J FixedReset 242,876 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-05-01
Maturity Price : 23.21
Evaluated at bid price : 24.14
Bid-YTW : 4.83 %
BAM.PF.I FixedReset 169,738 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2022-03-31
Maturity Price : 25.00
Evaluated at bid price : 26.00
Bid-YTW : 3.82 %
CM.PR.R FixedReset 158,262 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2022-07-31
Maturity Price : 25.00
Evaluated at bid price : 25.24
Bid-YTW : 4.18 %
CM.PR.S FixedReset 135,187 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-05-01
Maturity Price : 22.96
Evaluated at bid price : 24.40
Bid-YTW : 4.59 %
BAM.PR.R FixedReset 119,500 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-05-01
Maturity Price : 20.28
Evaluated at bid price : 20.28
Bid-YTW : 5.18 %
TRP.PR.K FixedReset 103,305 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2022-05-31
Maturity Price : 25.00
Evaluated at bid price : 25.88
Bid-YTW : 4.20 %
There were 29 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
MFC.PR.M FixedReset Quote: 22.85 – 24.25
Spot Rate : 1.4000
Average : 0.8072

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.85
Bid-YTW : 6.01 %

IAG.PR.I FixedReset Quote: 25.26 – 25.95
Spot Rate : 0.6900
Average : 0.4137

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2023-03-31
Maturity Price : 25.00
Evaluated at bid price : 25.26
Bid-YTW : 4.78 %

TD.PF.E FixedReset Quote: 24.48 – 24.85
Spot Rate : 0.3700
Average : 0.2348

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2020-10-31
Maturity Price : 25.00
Evaluated at bid price : 24.48
Bid-YTW : 4.61 %

TRP.PR.H FloatingReset Quote: 16.52 – 16.97
Spot Rate : 0.4500
Average : 0.3258

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-05-01
Maturity Price : 16.52
Evaluated at bid price : 16.52
Bid-YTW : 3.78 %

TRP.PR.B FixedReset Quote: 16.46 – 16.85
Spot Rate : 0.3900
Average : 0.2671

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-05-01
Maturity Price : 16.46
Evaluated at bid price : 16.46
Bid-YTW : 4.98 %

MFC.PR.R FixedReset Quote: 26.19 – 26.50
Spot Rate : 0.3100
Average : 0.2037

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2022-03-19
Maturity Price : 25.00
Evaluated at bid price : 26.19
Bid-YTW : 3.70 %

2 Responses to “May 1, 2018”

  1. BarleyandHops says:

    For people in the 55 to 64 age bracket, the increase was more dramatic—from 34 per cent to 46 per cent. This casts a new light on that 170 per cent debt-to-income ratio I cited before

    Wow. I find this rather shocking. This coupled with fewer having defined retirement benefit plans and a near decade of ZIRP, and a lower savings rate: Well, the golden years may not be so golden. Unless the Banks introduce something like the “Inheritance Mortgage” where your sons and daughters get to split the debt after you lived out your life – current avg. life expectancy in Cda is 82.14 (2015).

    Then again I see some governments are all over this. Sweden reduced the max. amortization period to 104 YEARS from the average of 140 YEARS. So maybe we have already arrived. Inter-generational debt. I must admit I really dont understand how this works.

  2. jiHymas says:

    I remember being very impressed in the late eighties / early nineties when I read about Japanese Century Mortgages:

    Homes in Tokyo now sell for 15 times the average salaried worker’s annual gross wage. Even small condominium units, 68 meters square, sell for nearly 10 years’ pay. First-time buyers would have to contract 50- to 90-year mortgages to make the payments, even at Japan’s relatively low interest rates; one lender has even begun offering 100-year housing loans. Land prices paid in the Tokyo run-up made returns on some commercial property a matter of a century or more. It is clear that, once leases begin to expire, steady rent increases will have to ameliorate that impossible pressure. The result: inflation and a downward trend in home ownership for first-time buyers are being built into the Japanese economy for decades to come.

    Does any of that sound familiar?

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