March 28, 2019 | So?

How much do you owe? Seriously. More than you make in a year? Or two? Is your net worth positive or negative? Have you ever thought about it?

Most people don’t ask such questions. Now that the economy’s slowing, central banks have turned into kittens and a nervous government’s paying moisters to buy houses, it’s time to reassess. Are you in a safe place? Can you weather a debt storm? Because there may be one.

First. Let’s compare Trudeau’s Canada with Trump’s America. To be fair, neither leader is directly responsible for the astonishing graph below, but they both influence it. In Canada politicians encourage borrowing, spending and debt with endless real estate incentives. (We got two more last week.) In the US a far higher proportion of households hold financial assets, having learned the lesson that house lust can be costly, even deadly. You can see below exactly when the American property bubble burst – and how that encouraged a debt purge. We have yet to follow.

Here’s the latest news, updated in the last few days by StatsCan.

In the final three months of 2018 our debt load expanded faster than incomes. A new debt-income ratio of 178.5% was set. Then there’s a debt service ratio – the amount of money people must shovel out monthly to carry their loans. Also at a record high, and building for more than a year. So wages aren’t keeping pace with payments.

Together we borrowed a fresh $21.2 billion in the Q4 of ‘18. That brought total household debt to $2.21 trillion, which is bigger than the entire economy. Of that, $1.44 trillion sits in mortgages, with $769 billion in consumer credit, of which $243 billion is in HELOCs, secured by real estate.

Those numbers are hard to digest. They suggest people have borrowed so much money against the future that it’ll take decades (forever, if we don’t stop borrowing) to move the needle. Of course, if we keep buying houses we can’t afford, things will get worse. Until they pop. That day is closer than it was five years ago, or last spring.

But even without a real estate disaster, swelling debts and inadequate incomes mean families have less to spend on essentials like cars, iPhones, Netflix and tats. Since two-thirds of our economy is based on consumer spending, this pretty much ensures a slowdown is coming.

Look at car loans, for example. Delinquencies are at a post-GFC high, and more people are opting to lease rather than buy since rates increased. It’s all about the lowest possible monthly payment – which is why we’ve seen insane developments like 96-month repayment plans for hunks of metal that might last 72 months.

Meanwhile the debt disease is evident in plunging RRSP contributions, plus TFSAs that are just 10% maxed out. Four in ten people report they’re one missed paycheque away from a crisis. Our national savings rate has dropped to 0.8%. Yikes. From 1981 until 2018 it averaged 7.8%. In the US the rate is 7.6%. This is the result of Canadians carrying the biggest personal debt load (measured against the economy) in the entire western world. A bank survey found 32% of citizens between 45 and 64 have saved nothing. Zero. They’ll be retiring on the piteous public dole.

A constant theme of this pathetic blog is that our fetish with real estate has created this disaster-in-the-making. Close to 70% of us have property, but a minority have the liquid assets necessary to finance their lives, while they are carrying epic amounts of debt.

Of course, you’re not included in any of this. You come here. Must be smart.

But nobody will be untouched if the debt tsunami hits. Here are six things to consider doing. Soon.

First (duh), stop borrowing to finance consumption. Second, only borrow if you can achieve tax-deductible debt, used to increase liquid assets. Yes, there is logic to removing equity from real estate and placing it somewhere with a better future.

Third, calculate your net worth (assets less debt). Then apply my Rule of 90. The proper percentage of NW to have in RE is 90 less your age.  So a 25-year-old debt slave can still have hope. But a 65-year-old Boomer best beware. Fourth, rates are falling as the economy softens, so use this as a tool to reduce high-cost debt.

Fifth, strive for balance in your portfolio. As central banks add monetary stimulus (lower rates), bond yields will fall more and bond prices rise. You need some, since they also counter inevitable volatility on equity markets. Meanwhile preferreds have been sideswiped by falling rates, but offer a 4.5% dividend rate and cheap taxes. Love them both.

And, six, don’t have home country bias. Go beyond maple. Canadians have created their own made-here debt crisis which could whack the dollar and stifle economic growth. Nothing wrong with some exposure to the Canadian equity market, but be at least equally weighted in both US and international securities. Plus, as oft mentioned, it’s wise to keep a quarter or so your portfolio in US$.

So, how much do you owe? What’s your net worth? Are you ready?

Garth Turner March 28th, 2019

Posted In: The Greater Fool

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