Only a matter of time

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Yesterday’s vivisection of a profligate doctor on this site, complete with blood, guts and goo was, yes, an extreme example. Many people wondered how a $500,000-per-year couple could have stuff, but no money. Others understood it completely. What the doc/yoga lady gave us was a vivid reminder of how screwed up society’s priorities have become. Big hat, no cattle.

But what about the rest of us? Average incomes are far south of a hundred grand. The typical house costs less than half a million and the jobless rate’s at a 43-year low. Surely most people, unlike those crazy 1%ers, have their heads screwed on right?

Not so fast. Let’s check the stats.

Last month the inflation rate was 2%. Not only did that mean all the money in your high-interest savings account is losing money, it’s also bad news for most families. They’re falling further behind in a country where incomes are moribund. Despite a tighter labour market, employers are cautious and stingy. The average annualized wage increase in December was a mere 1.49%. The month before, just as bad – 1.46%. In fact since peaking briefly in May (3.9%) incomes have eroded steadily, compared to the rising cost of living.

Debt? Going in the other direction. Household debt in total increased 3.5% last year, to more than $2 trillion. The debt-to-income ratio hit 178%, a record. In Vancouver it’s over 250%. Among people buying million-dollar houses in Toronto, it’s over 400%. Despite higher mortgage rates, several Bank of Canada increases and tighter lending regulations, we actually increased our overall borrowing. Incredible.

But here’s why.

House Prices relative to Incomes

Source: The Economist

If this doesn’t make you reflect on what’s coming, well, you’re thick. Or preoccupied. Or house horny. Despite the best job market in forty years, with tame inflation and low rates, families are so financially stressed they’re borrowing more just to get by. Incomes are too low to buy houses, or houses cost too much relative to wages. Either way, it’s unsustainable. So, houses have to deflate or salaries mushroom. Guess which is more likely?

This underlines the greatest financial risk in a nation where 70% of people have exposure to one asset class – usually constituting most or all of their net worth. In the five months between July and the end of November last year, while real estate markets wobbled in terms of sales and prices, Canadians added $17.1 billion to outstanding mortgage debt (to $1.54 trillion). This took place even as the pace of new mortgage borrowing at the banks cratered, showing the dramatic impact of house prices which have become detached from reality.

Face it. We’re buying what we cannot afford. So long as we keep at it, the danger grows. Just imagine the devastation that would take place in, say, Vancouver if prices toppled as they did in Phoenix or Los Vegas. Certain postal codes in those cities (which experienced explosive price growth during the preceding boom) saw assessments plunge  70%. That’s extreme. But possible. And far more likely than a wealth-stealing plop by global equity markets.

We’ll say it again. The goal of life is not a house. Having one is cool, but there are options, like renting. You can live a fine existence without real estate, but not without income, especially when you get old. If properties cost three or four times a family’s annual income, we wouldn’t be having this discussion. But in most places, they don’t. Wives and husbands are financially gutting themselves to obtain one, which is clearly shown by the billions in new debt every single month, while incomes stagnate.

Did you see the new polls on Monday?

Two-thirds of Canadians fret over their financial futures. A third worry they’ll go further into debt this year. An equal number claim they may not be able to maintain monthly payments. And 14% believe recent mortgage increases are unaffordable. “If debt levels don’t come down,” says Credit Canada, “and people don’t start to get serious about paying off their debt, it’s only a matter of time before we’re in major trouble. You can only bury your head in the sand for so long.” Meanwhile MNP has found that almost half of us (46%) are $200 or less away from financial insolvency at the end of each month. Over 50% report higher interest rates are hurting them. “Many have so little wiggle room that any increase in living costs or interest payments an tip them over the edge,” the company says. “That’s what we’re seeing happen right now.”

But most people will never heed this message. They won’t change. They don’t come here. They never heard of me, or this blog. The Trivago guy’s more popular.

But you’re here. And you know what’s coming.