Canada Maxed Out

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Includes: BBCA, EWC, EWCS, FCAN, FLCA, HEWC, QCAN
by: Danielle Park, CFA
Summary

Today, Canadian households are world leaders in terms of average household debt that is 180% of average disposable income and a household saving rate that is near an all-time worst at just 1.1% of income.

At the same time, Canadians are struggling with some of the least affordable home prices in the world.

Canada has never been less prepared for an economic slowdown/income loss/rise in unemployment, and yet, it is underway nonetheless.

A decade of ultra-low interest rates and lax lending enabled Canadians to borrow and spend their way into a state of extreme financial fragility. Today, Canadian households are world leaders in terms of average household debt that is 180% of average disposable income (second only to Australians at 200%) and a household saving rate that is near an all-time worst at just 1.1% of income.

At the same time, Canadians are struggling with some of the least affordable home prices in the world (inflated by years of easy lending and debt addition). The more and longer one pays for shelter and related costs, the less one saves for other goals like retirement and children's education. Meanwhile, Canadian household consumption has been driving some 60% of the nation's economy (GDP). Bottom line: Canada has never been less prepared for an economic slowdown/income loss/rise in unemployment, and yet, it is underway nonetheless.

This has daunting implications for households, lenders, real estate prices, business revenues, tax receipts, deficits and financial stability overall. It also suggests great investment opportunities will present as this downcycle plays out, but only for those who anticipate and position for it in advance.

The number of Canadians who are $200 or less away from financial insolvency every month has climbed to 48 per cent, up from 46 per cent in the previous quarter, in a sign of deteriorating financial stability for many people in the country, according to a new poll...

"Canadians appear to be maxed out with no real plan for paying back what they have borrowed," said MNP President Grant Bazian in a release. "This raises many alarming questions about how and if consumer debt will be repaid, particularly if conditions deteriorate or interest rates rise."

Disclosure: No positions.

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.