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Business Briefing ‘You may not be as rich as you think’: Canadian families face a long road back to financial health

Briefing highlights

  • A deep look at debt and wealth
  • Stocks, loonie, oil at a glance
  • Air Canada scraps financial outlook
  • Manufacturing sales rise in January
  • Imperial slows development of oil sands project
  • From today’s Globe and Mail

You may not be as rich as you think

— Toronto-Dominion Bank economist Ksenia Bushmeneva

You’ll see some troubling signs if you delve deep into Statistics Canada’s latest look at household debt and wealth.

We tend to focus on a key measure, the ratio of household debt to disposable income, and for good reason. But the federal agency’s report in its entirety suggests a long road back to financial health for many Canadian families.

“You may not be as rich as you think,” Toronto-Dominion Bank economist Ksenia Bushmeneva said after looking at one of the other measures.

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This, of course, follows a credit binge that left many families vulnerable and helped drive home prices to inflated levels. The federal, B.C. and Ontario governments tried to cool it all down, seemingly successfully, with new mortgage-qualification stress tests and other measures.

And this obviously has ramifications for the economy, notably what it could mean for consumer spending that has helped drive growth.

Borrowing among Canadians has slowed markedly. But where we stood in the fourth quarter of last year remains worrisome.

Here’s a look at some of those key statistics:

Wealth

Household asset ratios “dropped notably” in the fourth quarter, Bank of Montreal economic analyst Priscilla Thiagamoorthy pointed out.

Net worth as a proportion of disposable income fell in the last three months of 2018 to 844.11, from 873.19 in the previous quarter, according to Statistics Canada.

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This was because of “the one-two punch of softer real-estate prices and lower equities in the quarter,” Ms. Thiagamoorthy said.

“Meantime, the debt-to-asset ratio climbed to 17.3 per cent,” she added, noting the hit to stock prices in late 2018.

“In other words, Canadian households now have $5.78 of assets for every $1 of debt, continuing to grind lower. And, owner’s equity in real estate drifted down to 73.5 per cent.”

That equity as a proportion of real-estate holdings has now fallen almost a full percentage point in the last year, and 1.5 points from the peak, added BMO senior economist Robert Kavcic.

Not only that, it’s among the biggest hits of the past quarter-century, one that came in the early 1990s, the other during the financial crisis.

“Raise your hand if you remember zero-down/40-year amortization mortgages – that was a thing in Canada until the U.S. proved that continued easing of standards might not end well,” Mr. Kavcic said.

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“The latest decline comes on the back of lower home prices again, but this time triggered by a mix of factors: Recession in oil-producing provinces; targeted measures to address speculation/foreign investment in Ontario and B.C.; and tightened lending standards.”

It’s the wealth side of the ledger that prompted Ms. Bushmeneva’s comment above.

“After two back-to-back declines in the second half of last year, the wealth of Canadian households was actually lower at the end of 2018 than it was a year ago,” she said in a report.

“This marks the first year-over-year decline in household wealth since 2009, as stock and oil prices plunged and real-estate values fell.”

There could well be a rebound in the current quarter, given that financial assets perked up, Ms. Bushmeneva added in an interview, but real estate “remains subdued.”

The fourth-quarter decline in net worth was the biggest on record, in dollar terms, noted Royal Bank of Canada senior economist Josh Nye.

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“To be sure, we don’t expect the scale of Q4’s decline will be repeated,” Mr. Nye said.

“But a slowdown in housing and flatter price trends means real-estate values won’t provide the wealth boost they have in recent years,” he added.

“Meanwhile, while equities aren’t expect to repeat Q4’s sharp decline, they’re unlikely to see the same gains as over the last decade. On balance, we expect a much slower pace of household wealth creation going forward.”

Debt

That key statistic of household debt to disposable income rose in the final quarter to a record 174 per cent, on a seasonally unadjusted basis.

Adjusted, it rose to 178.5 per cent, which means Canadian families owe about $1.79 for each dollar of disposable income.

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That’s because the increase in debt eclipsed the growth in income.

This measure has “flattened out” since the Bank of Canada first started raising its benchmark interest rate, Mr. Nye said. And, remember, it has since called a temporary halt to its rate-hiking cycle.

Nor do economists expect that measure to spiral out of control.

But the “numbers highlight the challenge consumers face in growing into (or out of) their heavy debt loads,” Mr. Nye said.

“It will take a long period of household incomes outpacing credit growth to deliver meaningful improvement in the debt-to-income ratio. We’re not seeing that yet.”

Debt servicing

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The key measure here, and it’s an important one, is the household debt service ratio, which, as we all feel, is what we owe in principal and interest, as a percentage of our disposable income.

That hit 14.9 per cent in the fourth quarter, just about matching its previous 2007 high, TD’s Ms. Bushmaneva noted.

On top of that, as Mr. Nye pointed out, it’s up from 14 per cent from mid-2017, when the Bank of Canada began raising rates.

“While we expect the BoC won’t be raising rates again until later this year, the [debt service ratio] is still likely to edge higher in the coming quarters as homeowners renew fixed-rate loans at higher interest rates,” Mr. Nye said.

“At this stage, we think the increase in debt servicing costs is more of a headwind to consumer spending than a financial stability risk,” he added.

“While the debt service ratio is high by historical standards, the pace of increase is not out of line with previous tightening cycles. And clearly the BoC is sensitive to the challenges facing households.”

BMO’s Ms. Thiagamoorthy also noted that more of our income went to interest payments alone, the highest in nine years at 7.34 per cent.

“This will be something that bears watching after a period of remarkable stability, though the pullback in market rates could mean households will get some reprieve on this front,” she said.

What all of this suggests is that we’re pulling back on what we spend, which will further affect economic growth.

“We take a bit of consolation in the fact that some reprieve for household balance sheets will arrive this year,” said Ms. Bushmeneva.

“Stock markets have been on firmer footing and the Bank of Canada is expected to keep rates constant, removing some pressure on debt-servicing costs,” she added.

“Still, lower household wealth and a cooling property market will likely hurt both consumer confidence and spending – a concern also reiterated by the Bank of Canada – further adding to the number of headwinds hindering Canadian economic growth this year.”

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Markets at a glance

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Air Canada scraps outlook

Air Canada is scrapping its previous financial outlook because of the grounding of Boeing 737 Max aircraft after the Ethiopian Airlines crash.

“In light of the current uncertainty, Air Canada is suspending all financial guidance it provided on Feb. 15, 2019, and Feb. 28, 2019, in respect of the 2019 financial year,” the airline said in a statement today.

“The financial guidance provided for the years 2020 and 2021 with respect to annual EBITDA margin (earnings before interest, taxes, depreciation, amortization and impairment, as a percentage of operating revenue) and annual ROIC (return on invested capital) as well as the cumulative free cash flow over the 2019-2021 period remains in place,” it added.

“Air Canada continues to adapt a contingency plan to address the evolving situation and will provide updates as developments warrant.”

Air Canada has 24 Max aircraft, and WestJet 13.

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Manufacturing sales rise

Canada’s manufacturing sector finally posted a stronger month after three straight hits.

Sales rose 1 per cent in January, Statistics Canada said. And when you strip out price effects, volumes climbed 1.4 per cent.

Unfilled orders declined 1 per cent, and new orders tumbled almost 12 per cent, but that was largely because of the volatile aerospace and parts industry.

“It was about time the Canadian manufacturing sector showed some signs of life, and the 1-per-cent advance in the first month of 2019 will hopefully be the start of a new stronger trend after the weakness seen in the second half of 2018,” said senior economist Andrew Grantham of CIBC World Markets.

“While it’s still difficult to get too excited about the trend in the manufacturing sector, given that today’s advance only offsets part of the weakness since last July’s peak, it could be a slight positive for the [Canadian dollar] today,” he added.

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