Debt is Dangerous

Jul 03, 2013

finance economics canada debt

This Bloomberg article answers exactly what I've been questioning for the past 8 years: how is it that people in Canada (and Vancouver, in particular) can afford to live such extravagant lives?

Well, the answer is that they can't. And I knew that they couldn't live their lives like that, but I never had any empirical evidence to back it up. Tthe article displays the following graphic at the top, to highlight just how screwed us Canadians are in the near term.

Just look at that graph! In 2012, 13% of Canadian households (that's 2 or more people at the same address) had a debt ratio of 2.5:1 or more. For every $1 they made, they owed $2.50. Scared yet? Let me add two more facts to the graphic:

1. The household income is calculated before the government takes away 30-40% in taxes.
2. The household debt does not include mortgage debt.

Let those two points sink in for a moment. 13% of Canadian households need to pay $2.50 on every $1 they make, but the government takes $0.35 of that $1, which skews the ratio to 2.5:0.6, or about 416%. Then, add to the fact that household ownership is at an all-time high of over 70% in Canada and you can start mixing in some mortgage debt. Since there's no hard data (that I can find) on what the average mortgage debt is we have to assume that it will push the debt ratio much higher than 416%!

So this is what has become of a country that, two generations ago, consisted of savers and penny pinchers. Our citizenry has gorged on cheap money and is now poised to choke on it, but still the savers get screwed when a savings account provides 1% annual interest (usually less).

I would love to know what the debt ratio of the average Vancouverite is, because there is no way that the following 3 facts can positively correlate:

1. Average detached house in Vancouver is worth over $1,000,000 ¹.
2. Luxury cars are seen everywhere in the city, so much so that many new luxury car dealerships have sprung up to meet the demand.
3. Median income (for a single person) in Vancouver is $43.215 ² and, although the data is from 2005, incomes have remained stagnant in the past decade and actually decreased 3.8% from 2000-2005.

Looking at this data alone should scare anyone that has a high debt load. The interest rates will be rising soon so please, if you have debt, get your affairs in order now or else you could be screwed for a very long time. Debt is not a pretty thing, especially when you are restricted from living your life to the fullest. However, if you chose to abuse debt and blow all the money on stupid things that depreciate, then I am pleased to say that you will be getting what is coming to you.

My hope is that Vancouver house prices get off of their high horse and come down to a level that is actually attainable by the average resident. I'm talking $200,000 to $500,000. Looking on mls.ca now, there is not one freehold single detached home in all of Metro Vancouver that is for sale below $200,000. It has hollowed out the starter home market for a whole generation of young families (myself included).

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