One wag in our newsroom notes that Merrill Lynch, of all firms, would certainly know about “debt out of balance”, but the firm's Canadian economist, David Wolf, is a pretty sharp cookie. His latest piece of research takes a look at level of household debt in Canada and compares it to household debt levels in the U.K. and the U.S., where rising household debt combined with rapidly falling housing prices to produce a financial crisis in those countries. His conclusion:
What worries us is that Canadian households have been running a larger financial deficit than households in either the US or the UK…. After forty years of net saving, Canadian households moved into sustained deficit in 2002. In 2007, household net borrowing amounted to 6.3% of disposable income, a wider deficit than in the UK, and not far off the peak US shortfall seen in 2005.
These data imply that the Canadian household sector is now overextending itself as much as the US or UK ever did, challenging the consensus view that Canadian lenders and borrowers have been far more conservative through the cycle. …
The clear 'tipping point' in the US was the emergence of falling house prices in the summer of 2006, kicking off the vicious circles that have brought the financial system and the wider economy to the brink. We're just now starting to see house prices fall in Canada, and sharp rises in unsold home inventories increasingly imply that this will not be a transitory phenomenon.
From this perspective, the absence of a Canadian credit crunch to date may be cause for concern, not comfort. How can it be good that mortgage debt is growing at a double digit pace against an asset class now seeing deflation?
Tags: economy, financial crisis, canada, merrill lynch, david wolf