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Canada’s Advantages Mitigate
Household Debt Risks
Derek Holt
Vice-President,
Scotia Capital Economics
Presented to the Durham Economic Prosperity Conference, November 5th, 2010
U.S. Growth To Stumble If Tax Cuts Not Extended For All
Upper Earners Do the Heavy Spending
45
40
% share of grow th in income
and consumption, 2003-08
35
30
25
Total income
Total spending
20
15
10
5
0
<$70k
$70-80k
$80-100k
$100-120k $120-150k
Source: Bureau of Labor Statistics, Scotia Capital Economics
$150k+
Double Dip Risk Via U.S. Fiscal Drag In 2011-13
5
T he B o C ' s A s s um pt io ns o n
U.S . G ro wt h
Barro's "five-year plan" Estimates from 2009-2013
4
400
3
300
2
200
1
US$ bns
Incremental
Government Outlays
Change in GDP
100
0
0
-100
-1
-2
GDP Excluding Stimulus
-3
Estimated Co ntributio n
o f Stimulus
GDP
-4
-5
2009
2010
2011
2012
Source: BoC, Scotia Capital Economics.
-200
-300
-400
2009
2010
2011
Source: Wall Street Journal; Scotia Capital Economics
2012
2013
Impact of Softer US Growth
G ro wt h D e c line Im plic a t io ns
E m e rging A s ia
O t he r A dv a nc e d E c o no m ie s
impact of a 1%decline La t in A m e ric a
in growth rate of the
United States
A f ric a
M e xic o
C a na da
-0.5
-0.4
-0.3
-0.2
-0.1
Source: IMF, Scotia Capital Economics.
0.0
BoC Likely On Hold – But Importing Longer-Term Risks
Central Bank Rates
6
%
U.S.
forecast
5
4
Canada
3
2
1
0
02
03
04
05
06
07
08
09
Source: Bank of Canada; Federal Reserve; Global Insight; Scotia Economics.
10
11
Canadian Home Ownership Rate At All-Time High
70
%
Now 70%?
68
US Peaked at 69%
66
64
62
60
Average = 63.8%
58
56
51
61
Source: Census Canada.
71
76
81
86
91
96
01
06
Canadian Renovation Spending Coming Off Record High
Renovation Spending
Canadian Renovation Spending
12000
1.2
millions, saar
% PDI, sa
1.0
10000
8000
0.8
6000
0.6
4000
0.4
2000
0.2
0
0.0
71
76
81
86
91
96
01
06
Source: Statistics Canada, Global Insight, Scotia
Capital Economics
71
75
79
83
87
91
95
99
03
07
Source: Statistics Canada, Global Insight, Scotia
Capital Economics
Average Resale Home Prices in Local Currencies
400
$ 000s,
local currency
Canada
350
300
250
200
U.S.
150
100
50
0
80
83
86
89
92
95
98
Source: CREA, NAR, Global Insight, Scotia Capital Economics.
01
04
07
10
Not Just One or Two Cities Driving House Price Gains
Provincial Resale Prices
180
160
140
120
100
80
60
40
20
0
% chg from Dec. 1999
- January 2010
MB SK Nfld AB BC QC NS ON NB PEI
Source: CREA, MLS, Scotia Capital Economics
Canadians More Heavily Leveraged Than All But U.S.
30.0
%
Household Liabilities
as Share of Assets
US
25.0
Canada
20.0
UK
15.0
10.0
Japan
Germany
France
Italy
5.0
0.0
98 99 00 01 02 03 04 05 06 07 08 09 10
Source: OECD, Federal Reserve, Statistics
Canada, Scotia Capital Economics
Canada’s Debt Service Burden at All-Time High
25
20
Canada's Household Debt Service Burden
interest payments on all debt +
mortgage principal payments
Total
(% share of after-tax PDI )
15
10
Interest
5
Principal
0
82 84 86 88 90 92 94 96 98 00 02 04 06 08
Source: Bank of Canada, Statistics Canada, Scotia Capital Economics
Source: Bank of Canada, Statistics Canada, Scotia Capital Economics.
10
Still Backed by Excellent Corporate Balance Sheets
Source: Statistics Canada, Quarterly Survey of Financial Statements
Canada’s Public Finances Deleveraged Early
120
% of GDP
100
Gross Debt
80
60
Net Debt
40
20
0
70
74
78
Source: OECD, IMF.
82
86
90
94
98
02
06
10f
Canadian Home Equity Offers Solid Support
Canadians Have a Solid Cash Buffer
Firmer Micro Foundations to Cdn Mortgage
Markets, Despite Macro Parallels
• Explicit GSE guarantees
• Strongly capitalized banks & captive dealers, no shadow banking leverage
• Totally different funding model: deposit funding & large held-on-book
component, versus reliance upon revolving door financing
• Financial institutions less reliant upon short-term lines
• No strategic defaults, outside of Alberta & Saskatchewan
• Less outsourcing of sales force in Canada
• Generally more conservative products, but not entirely
• No option ARMs in Canada, but entire book resets within 5 years
• No mortgage interest deductibility (with exceptions)
• Stricter underwriting criteria including independent appraisals & hair-cuts
Contacts
Economics
Derek Holt, Vice-President
416-863-7707
[email protected]
Gorica Djeric, Financial Markets Economist
416-862-3080
[email protected]
Disclaimer
This report has been prepared by SCOTIA CAPITAL INC. (SCI), a subsidiary of the Bank of
Nova Scotia. Opinions, estimates and projections contained herein are our own as of the
date hereof and are subject to change without notice. The information and opinions
contained herein have been compiled or arrived at from sources believed reliable but no
representation or warranty, express or implied, is made as to their accuracy or
completeness. Neither SCI nor its affiliates accepts any liability whatsoever for any loss
arising from any use of this report or its contents.