Had to chuckle reading this one I wrote in 2010, about then B of C governor Mark Carney saying low interest rates aren’t a long term solution. Think he missed on that one, as they are still here, and there is no sign of them going away. Maybe a cautionary tale?
Be Prepared for a Big Jump
The Bank of Canada’s Governor Mark Carney warned on Monday that we Canadians better not get used to Loose Money because Bank Rate increases will happen soon, and when they do, they may be Sharp and Swift which means it is time to start thinking about dumping debt quickly.
Mr. Carney was actually quite blunt when he pointed out in his conclusions:
“… Cheap money is not a long-term growth strategy. Monetary policy will continue to be set to achieve the inflation target. Our institutions should not be lulled into a false sense of security by current low rates.
Households need to be prudent in their borrowing, recognising that over the life of a mortgage, interest rates will often be much higher….”
Can he be any more blunt? The days of cheap interest rates are soon to be coming to an end, and carrying large debt loads may not be the best idea in the near future.
Why might he make such a blunt statement? Our friends at Stats Canada pointed out in their report Q3 2010 National balance sheet accounts that we are in fact getting farther into debt (in households).
Our National net worth per capita is up, which sounds like something good, however, a more insidious issue comes forward, that households are carrying, more and more debt.
Households currently hold about $1.505 Billion in debt which is pretty darn hefty, and thus we have Mr. Carney’s remarks about maybe wanting to lower that down pretty soon. The table supplied by Stats Canada is quite enlightening:
Household Sector Fiscal Indicators
| Second quarter 2009 | Third quarter 2009 | Fourth quarter 2009 | First quarter 2010 | Second quarter 2010 | Third quarter 2010 | |
|---|---|---|---|---|---|---|
| Market value, not seasonally adjusted | ||||||
| Household sector | ||||||
| Net worth | ||||||
| Household net worth per capita ($) | 166,200 | 171,000 | 173,700 | 176,100 | 174,500 | 178,600 |
| Net worth as a percentage of personal disposable income (%) | 584.27 | 602.29 | 610.48 | 615.14 | 602.37 | 614.30 |
| Total assets to net worth (%) | 124.70 | 124.35 | 124.31 | 124.24 | 124.87 | 124.62 |
| Financial assets to net worth (%) | 68.02 | 68.73 | 68.91 | 68.93 | 68.33 | 68.96 |
| Financial assets to non-financial assets (%) | 120.02 | 123.60 | 124.37 | 124.61 | 120.87 | 123.89 |
| Owner’s equity as a percentage of real estate (%) | 68.36 | 68.17 | 68.02 | 68.13 | 67.91 | 67.71 |
| Real estate as a percentage of personal disposable income (%) | 286.09 | 289.44 | 292.22 | 294.84 | 295.23 | 296.58 |
| Debt | ||||||
| Household debt ($ billions) | 1,385 | 1,410 | 1,433 | 1,450 | 1,480 | 1,505 |
| Household debt per capita ($) | 41,000 | 41,600 | 42,200 | 42,700 | 43,400 | 44,000 |
| Credit market debt ($ billions) | 1,365 | 1,390 | 1,413 | 1,430 | 1,459 | 1,484 |
| Debt to personal disposable income (%) | 144.12 | 145.70 | 146.97 | 148.18 | 145.37 | 150.19 |
| Credit market debt to personal disposable income (%) | 142.08 | 143.84 | 144.94 | 146.14 | 143.42 | 148.09 |
| Consumer credit and mortgage liabilities to personal disposable income (%) | 130.34 | 132.34 | 133.72 | 134.90 | 132.62 | 137.04 |
| Debt to total assets (%) | 19.80 | 19.58 | 19.56 | 19.51 | 19.91 | 19.75 |
| Debt to net worth (%) | 24.70 | 24.35 | 24.31 | 24.24 | 24.87 | 24.62 |
| Credit market debt to net worth (%) | 24.34 | 24.00 | 23.97 | 23.90 | 24.51 | 24.27 |
| Consumer credit and mortgage liabilities to net worth (%) | 22.33 | 22.09 | 22.12 | 22.04 | 22.65 | 22.44 |
| Debt to gross domestic product (%) | 88.77 | 92.20 | 93.83 | 93.75 | 94.04 | 94.29 |
Strong words, yes, but little action to back it up. I mean, Carney has been saying these things for the better part of a year. He could have easily bumped things 25 basis points last time with little consequences.
Unfortunately, I don’t get his policy making. In one breath he’s saying stop spending so much yet rates have been low for far too long what else are (most) consumers going to do? You can’t have it both ways.
I’m more than fine if rates go up 50 or 100 basis points over 2011. I think they should but he should stop talking about it and do it already.
Geez, you’re rubbing off on me BCM! 🙂
Cheers,
Mark
What does StatsCan mean when they refer to ‘disposable income’? Is that what’s left after paying for housing, food, utilities? or does it include bills?
I’m trying to figure out where I stand compared to their report. I’m guessing better because all I have is a mortgage and a car loan, both of which I’m agressivly paying off.
Thanks
Disposable income is basically what’s left after everything is paid, so I think you have it right.
Great article. Bond yields have been rising pretty quickly lately. I wonder if these higher rates will stick, or lead to an economic slowdown that causes them to head lower again?
I don’t see rate hikes as “terrible”. If you manage your debt and haven’t risked your mortgage w/ a variable rate you will be fine for now. The people who will benefit? The millions of boomers who saw their retirement savings plummet 3 years ago who desperately need better interest rates.
If you chose a variable rate that is your call. You have benefited for YEARS. Switch to fixed or deal with the inherent risk a variable rate brings.