These are stories Report on Business is following Friday, Sept. 13, 2013.
Wealth, debt burden rise
Canadians are getting richer, but are saddled with troubling levels of debt, underscoring the vulnerability of some families when interest rates inevitably rise.
National net worth rose 3 per cent in the second quarter of the year to $7.3-trillion, Statistics Canada said today, climbing on a per-capita basis to $207,300.
Among Canadian families, household net worth rose 0.7 per cent, to $205,900 on a per-capita basis, led by rising property values.
But at the same time, a key measure of consumer debt rose again to a record level, having declined over the previous six months, raising questions again about the ability of some households to juggle their finances. While it may be some way off yet, interest rates will rise, which is why the Bank of Canada and Finance Minister Jim Flaherty have urged Canadians to mend their ways, particularly on mortgage debt.
According to Statistics Canada, mortgage debt stood at about $1.1-trillion by the end of the second quarter, up by $18-billion, while other consumer credit hit $500-billion.
The key measure of the debt burden – credit market debt to disposable income – rose in the quarter to 163.4 per cent from 162.1 per cent in the first three months of the year. That’s seen to be a dangerous level.
Economist David Onyett-Jeffries of Royal Bank of Canada prefers to look at the complete picture, however, rather than just that ugly debt measure.
“While the household debt-to-asset and debt-to-income measures deteriorated slightly in the quarter, this largely reflected the seasonal bounce in mortgage borrowing in the spring that is associated with the higher volumes of housing market activity during the peak home sales season,” he said.
He pointed out that the increase in household credit actually eased to 4.9 per cent, the slowest pace since late 2001, and this is a good sign.
“Combined with gains in household net worth and income, the moderation in household debt growth points to an underlying improvement in consumer finances that helps to mitigate what policy makers have long highlighted as the largest domestic risk to the Canadian financial system,” Mr. Onyett-Jeffries said.
Debt-to-asset and debt-to-net worth measures also rose, for the first time in a year, to 19.1 per cent and 23.8 per cent, respectively, which, while up, are still below the recession-era peaks of 20 per cent and 25 per cent.
Having said that, those readings are also still above where they traditionally stood before the global meltdown, at 16 per cent and 19 per cent.
While so much of the debt burden has been driven by mortgage debt, the rebound in the housing market over the past year has, of course, played a role.
But many economists believe the real estate market, pumped up by a rush by homebuyers to beat higher mortgage rates, will level off again.
That won’t necessarily bring down the debt burden to any great extent, but it will help.
“It’s not surprising to see household indebtedness pick up as home sales have been rebounding as of late, but we do not expect this trend to continue going forward,” said Toronto-Dominion Bank economist Diana Petramala.
“In large part, the increase in household indebtedness also reflects softer income growth over the first half of this year. Looking forward, as housing stabilizes and income growth picks up, the debt-to-income ratio is expected to remain close to its current, still elevated level.”
What does this mean for the Bank of Canada?
The central bank has warned in the past that it could raise interest rates in an effort to tame borrowing, though it recently backed off that as credit growth, which had outpaced income growth, slowed.
While things are still heading in the right direction in terms of slower credit growth, the latest Statistics Canada numbers, coupled with the rebound in housing, “raise some doubts,” said chief economist Douglas Porter of BMO Nesbitt Burns.
“If you listen carefully, you might hear quiet gulps from the Bank of Canada after Q2 Canadian household debt ratios edged up again following two quarters of moderation,” Mr. Porter said.
“But with longer-term interest rates on the rise, we suspect that loan growth will ultimately cool further, helping eventually trim the debt-to-income ratio,” he added.
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Gold prices are melting down again this morning in the run-up to a crucial meeting of the Federal Reserve next week.
The decline also comes amid suggestions from a key player at Goldman Sachs Group Inc. that bullion could sink below $1,000 (U.S.) an ounce.
Gold has been on the decline amid ever-improving economic signals in the United States, where the central bank is expected next week to decide to pull back on its massive asset-buying stimulus program, an $85-billion-a-month scheme known as quantitative easing, or QE.
“Tapering” has become the watchword for that pullback, possibly to the area of $65-billion a month.
“The real key in gold is to see the evidence of the improving economic data in the U.S.,” Jeffrey Currie, Goldman’s commodities research chief, told Bloomberg Television today.
In that interview, he also warned that gold could slip below $1,000 an ounce.
Gold fell today to just above the $1,310 mark, and is down by about 5 per cent this week.
"Gold is trading 0.7 per cent lower overnight, after getting steamrolled yesterday, plummeting 3.2 per cent (and briefly causing a 20-second halt in trading midafternoon)," said Carl Campus of BMO Nesbitt Burns.
"After essentially doubling in price from 2008 to 2013, gold has pulled back since the beginning of the year, declining more than 20 per cent so far in 2013 as the Fed has moved closer to reducing the amount of stimulus it has pumped into the economy."
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