Finally, Someone Who Gets It.

April 1, 2011 § Leave a comment

A number of publications have been giving the Canadian economy a bad rap (Wall Street Journal, I’m talking to you) and some of the figures may even seem to back them up. Debt-to-income figures are holding at 148%, but CIBC economist Benjamin Tal says the mortgage picture isn’t as bad as it looks.

In an interview Tal had with BNN on Tuesday, March 29th he said that “we cannot talk about the quantity of debt without talking about the quality of debt.”

Some speculators were of the belief that Canadian mortgage lenders gave out just as many sub prime ‘NINJA’ loans as our U.S. counterparts. To this, Tal states that “the quality of debt in Canada is totally different (than in the US before the crisis).”He goes on to say that “Subprime in Canada was less than 5% (of overall mortgage volume). In the U.S. it was 33%.”

Finally, someone who gets it! The Canadian mortgage lending industry was in no way dealing with the same lending products as the U.S., which is part of why we didn’t see a domino effect of Power-Of-Sale properties. The number of Canadians vulnerable “in terms of very low equity on their house and very high debt service ratio” is only 4%.

As for the type of credit Canadians have, it’s considered to be “good” (mortgage, student loan) debt more than “bad” debt (consumer credit cards, retail store credit cards). It looks like Canadians started easing off the debt too, with credit growth now at a 9-year low.

There is a downside, however. Canadians have gotten spoiled with ultra-low interest rates, and these rates have nowhere to go but up. When rates rise, “of course you will see some increase in defaults.” However, rates rise for a reason, Tal says—because the “economy is doing better.” When the economy improves, unemployment falls. “The unemployment rate, not interest rates, is the number one factor impacting defaults.” Higher rates will reduce consumption because people are forced to service more expensive debt.

And there we have it. Now can everyone stop fretting about household debt and adjust their perception to the broader picture? Fix unemployment and the wage disparity issues so that inflation doesn’t become unmanageable.

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