The hole

Tony runs a pawn shop in the wild burbs of metro Vancouver. “Pawn Stars,” he says, “was one of the best things that happened to us over the last few years. Our store is nothing like that (the one on the TV series) but the whole thing made pawns legitimate. Cool, even.”

But that’s not the reason Tony’s now a millionaire. That he attributes to debt. And real estate.

“It’s amazing the things we see. People basically live in these expensive houses worth god-knows-what, but they have no money. We see it every day when they bring stuff in so they can get over the bridge…”

Tony’s referring to the Port Mann bridge, connecting the burbs to Downtown Delusia. Electronic toll collection means people can drive across without paying, but later receive invoices by email or post. Once a bill passes $25 and has been outstanding for 90 days, drivers are unable to renew their license or buy car insurance until they find the money to pay. “That,” he says, “believe it or not, is when they bring in stuff to sell. So they can buy their damn insurance. It’s nuts. I love it.”

Maybe you’ve witnessed similar. Go door-knocking for a charity in an ‘upscale’ suburban hood in the GTA and see how many million-dollar houses are furnished inside with lawn chairs and TV trays, or have beater cars sitting in their cobblestone driveways. Without a doubt, Canadians en masse have been throwing everything they’ve got at a single asset, often ending up with a rich house, a bloated mortgage and an empty bank account.

“Some things,” Tony says, “I can’t believe myself. We loan money, besides buying things for cash. People will come in to give us $5 every week in interest on a $100 loan, because there’s no way they’re going to get an extra hundred bucks. So, we take it.”

Behaviour like this – buying houses we can’t afford with astonishing levels of household debt – is now such a serious issue that the international banking community is warning we may be pooched. Look at the chart below. It shows the percentage of new mortgages used to buy houses by people with a loan-to-income ratio of 450% or more. Check out Toronto, where we’re approaching the 40% mark.

Canadians’ appetite for debt is apparently bottomless. A scary story called globally this week by Bloomberg helped make that clear. A 10-year-long, house-horny real estate binge has created not only unaffordable prices, but given us debt that’s three times larger than the entire economy. The combined debt of governments, companies and households is now $4.4 trillion, of which mortgages alone are greater than $1.3 trillion. This is 288% of the nation’s GDP, making us more of a basket case than the US, which most Canadians think is the pinnacle of borrowing.

These days our government debt is actually under control (at least for now), but families are clearly out of control. Look how we stack up against the rest of the G-7 countries. Yikes.

Bloomberg

The Bank of International Settlements (sort of the central bank of central banks) says Canada is the only developed country “showing early signs of stress in its domestic banking system, amid unusually high credit growth.” Meanwhile too much debt means huge amounts of money must be directed to non-productive interest payments, diverted from investing and hurting growth. So, retail sales suck. The inflation rate is anemic. We’ll be lucky to hit 1% growth in 2016. Making it worse is the risk-averse nature of Canadians, who think financial markets are casinos and get aroused when some regional online religious ethnic credit union offers a 2% GIC.

Scariest of all? People believe houses are safe.

The feds disagree. It’s why lenders will soon be forced to share the risk on mortgage defaults. Also why Ottawa’s now desperately trying to guide the housing Hindenbubble in for a safe landing, instead of going all fireball. It’s why some big banks are cutting back on mortgage loans in the GTA or YVR, and why smart investors have twice as much US and international in their portfolios as they do maple.

Nobody has ever borrowed their way to prosperity. But if you wanna try, Tony’s your guy.