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Tagpersonal debt level

$600billion, $250billion, 2.99%, $1.5trillion… numbers to watch in 2012

$600billion….Recently, we heard that there was another crisis looming in the mortgage industry.  Last week, we saw CIBC make headlines when their wholesale lending division, Firstline Mortgages, made drastic changes to the lending policies, which included pulling out of the self-employment and new-immigrant lending programs. They also reduced their maximum mortgage limits.

So what happened?  Why did Firstline Mortgages make these changes?  Firstline told us this was in reaction to a report stating Canada’s self-employed and new-immigrant mortgages shared similarities with the U.S. Subprime mortgages.    But maybe there was another reason…  Shortly after this report, we got news that CMHC was approaching their mortgage limit.   The report said CMHC ‘s total insured portfolio was $541billion as of the end of Sept 2011.  The last increase was in 2008 when the govt raised the limit from $450billion to $600billion.    But now it remains uncertain if or when the govt will raise that limit… So now we have lenders and bankers wondering how this will affect the supply of mortgage insurance.. so, what do they do?  They cut out some of the less popular mortgage programs…  Nice, huh?

$250billion….But we are forgetting the private mortgage insurers.  Genworth Financial has stated they have plenty of capacity before they reach their govt approved $250billion limit (this limit is expected to increase to $300billion in a few months).  The only challenge for private insurers like Genworth, is that the govt only guarantees up 90% of it’s insurance to the lenders…. but 100% for CMHC .   This could case lenders to seek higher returns on their mortgages, meaning potentially higher interest rates…

 

2.99%….Remember that 2.99% No Frills rate special last month?  I can’t help but wonder what the executive boardroom was like when they saw their mortgage department come out with this rate…  at a time when the govt was clearly trying to cool the housing market and slow consumer borrowing…  It’s early in the year, but this has to go down as one of the most ill-timed moves of 2012…  Congrats BMO mortgage dept!  You did bring No Frills products to the forefront.  And this gave us a real opportunity to point out the shortcomings of this product..

$1.5trillion…Last years, we heard that personal debts levels had hit record highs.  Numerous articles and reports are telling us that we are borrowing too much.  Yes, it’s true, outstanding mortgage balances topped $1trillion for the first time in Canada.  That means $500billion of non-mortgage personal debt it out there.   And that number bothers me more than the mortgage balance.   Mortgage rates are at historical lows… home ownership and property investments should be encouraged.   But borrowing for new TVs, cars, computers and other items, should be discouraged.   We have to make a distinction.   GOOD DEBT VS BAD DEBT.  There is a difference.  Let’s not group all this debt in one category…

 

Good debt and Bad debt…. maybe we Canadians have more good debt?

I saw this recent article about Good debt and Bad debt…  Canadian Personal debt levels have now surpassed $1.5 trillion.  That’s a big number… should we be concerned?  I started to wonder how much of this is Bad debt?  Let’s take a closer look at these stats.

First, let’s define Good debt.. I agree with the article….to me, it’s debt that is used to accumulate an investment or asset….  and if it’s an investment then you may be able to deduct the interest costs from your income, making it tax-deductible…..  investments like a rental property, stocks, bonds, etc would qualify…Borrowing to invest in a rental property is good debt and you can deduct the mortgage interest and other property related costs from the rental income.

Bad debt is any expense where the interest is not tax-deductible and is used to purchase consumer goods… things like borrowing for a vacation, a 60″ TV, that new computer, or leather sofa..etc…  Hey, we all spend some money on these items, the key is to have some discipline.  Borrowing to buy a TV, computer, take a vacation, etc is generally a bad idea… save up for these purchases and then pay in cash.

Now the stats say that $1.5trillion makes up all personal debt including mortgages….  Hey, wait a minute… outstanding mortgage balances recently topped $1trillion in Canada…. If mortgages are classified as Good debt, then let’s subtract this from the total personal debt total of $1.5trillion…

We now have $500billion in potentially bad debt…  So let’s amend the household average debt to $58,000 per family of 4.   Is that really a high number?  And let’s look at our asset base… Guess what?  Our personal asset base is appreciating in value…Here’s a previous article that shows Canadians are borrowing wisely and we just taking advantage of theses record low interest rates to enhance our net worth…  And here’s a more recent article from CBC.ca stating our household credit is growing at it’s slowest pace since 2002.  Good to see some positive news put out by the media.

Remember, Good debt can help you grow your net worth… Bad debt is for personal lifestyle and usually decreases your net worth… We all have some bad debt, we just need to minimize it as best we can.

Personal debt level up…uhh, wait.. maybe we made a mistake?!

As you know, I have been very critical about the data that was being put out over the past few months regarding Canada’s personal debt levels.. We were being bombarded with reports and comments about our spending habits… I found it hard to believe that we could go from conservative nation to a casino nation in just a few years…

Sure, there is more debt…. Outstanding mortgage balances topped $1trillion for the first time… but we seemed to be growing at a moderate pace, year over year.. We didn’t have the 20% to 30% increases in real estate prices that we saw in 1987-89, or like our neighbors in the U.S. over the past decade.  Meaning there was less chance of a housing bubble or crash.

And what about our assets….?  It was hard to find any report about our net worth or assets…  There was one report from Ben Tal, Senior Economist CIBC, that didn’t get much notice but we reported it here on December 3rd…  here are some of those stats…

-there are 12.5million households in Canada…31% rent, 69% own..

-of the 69% that own, 39.9% have a mortgage and 28.9% have no mortgage.

-69% of homeowners with a mortgage have more than 20% equity in their homes… only 30% have less than 20% equity in their homes.

click here for the full story..

And now for the real stats

Personal debt to disposable income ratio has been reported at 148%… This figure has been recycled more than that gift bag from the wine store you received at Christmas…. and just like that gift bag that gets passed around from friend to friend, it comes with a different bottle… or in this case, different figures and opinions.

Let see how you like this vintage….   Some new reports just came out that should ease our concern about our personal debt levels and average net worth.  “Average household net worth has risen to an impressive six times the size of disposable income, up from an average of five times in the 1990s.”  That’s a quote from BMO’s Senior Economist, Sal Guatieri…  read more here.

What’s this?  You mean Canadians are actually investing their money and not spending it frivolously like the Federal Govt has been telling us for the past several months?

It gets better…

Here’s a little more info from CIBC Bank..   Those figures had to do with the personal tax refunds we were getting last year because of the stimulus packages…. Household debt in the third quarter grew at the slowest pace in nine years, while in the last month for which there is data — October 2010 — it was the softest in 15 years.read more here.

That’s right, WE ARE SPENDING LESS AND OUR ASSETS ARE GROWING FASTER THAN IN THE 1990’s. … But how can this be?  The Federal Govt has been telling us that our personal debt levels are at dangerous levels…  and they had to change mortgage rules to slow our spending habits….. Any of this make sense to you?

Here’s an article from Ellen Roseman from The Star that says Canada’s Stock Market has outperformed the U.S. markets for the past 7 years… and we are poised to outperform them for the next 10 years….

Feel good about yourself Canada….. Keep investing… keep borrowing and spending wisely….

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