Consumer Debt On Track To Follow Housing’s Decline

In every province but one, Canadian consumers are continuing their debt party like it’s perpetually midnight on New Year’s Eve, with little care about tomorrow morning’s hangover. Yet in British Columbia, it looks like the housing market has already crashed the party – and it’s a major buzz-kill.

A new quarterly report on Canadian consumer debt levels, from consumer credit-data provider TransUnion, tells a tale not unlike many other reports on Canada’s household debt problem: We’re at record levels, yet still climbing. TransUnion’s numbers show that average personal debt levels (excluding mortgages) at the end of 2012 were up 5.9 per cent compared with the end of 2011. Average debt increased in every province of the country last year – except British Columbia.

There, debt levels fell 4.1 per cent in the fourth quarter compared with the third quarter – a huge number given that the final quarter of the year typically features a runup in consumer debts, due to holiday-season buying. On a year-over-year basis, average B.C. debts dipped 0.1 per cent.

On the surface, B.C. looks like the last place to suddenly feel the compulsion to belt-tighten. The province’s economic growth last year was considerably above the national average, and slowed only slightly from the year before (an estimated 2.5 per cent versus 2.8 per cent in 2011). Not great numbers, but certainly no cause for consumers to run from the malls and start stuffing mattresses with their spare change.

But the housing market in B.C. – especially Vancouver and the Lower Mainland, where the bulk of the province’s population lives – is a different story. While the Teranet-National Bank House Price Index rose 3.1 per cent nationally last year, its Vancouver component fell 2 per cent, the only major market in the country to turn show a decline. And Vancouverites are braced for much worse to come: Home sales plunged more than 30 per cent in the fourth quarter, stark evidence of a market in disarray.

A Bank of Canada study last month found that Canadians’ willingness to run up non-mortgage debts has historically been closely tied to the value of their homes. When house prices rise, so do non-mortgage consumer debts – and when they fall, those debts retreat. In fact, the Bank of Canada researchers argued that changes in house prices account for the bulk of changes in non-mortgage debt. Mark this down to the “wealth effect” – higher home values drive up personal wealth of homeowners, giving them more valuable assets against which to borrow and a greater capacity to both spend and take on more debt. And when home prices decline, the opposite applies.

During the housing boom that was particularly loud in the Lower Mainland, British Columbians ran up the highest debt levels in the country. Sustaining debts at those heights would have been difficult anyway; the downturn in house prices, which may be only in the early stages of what many fear will be a hard fall, is a sure-fire catalyst for a deleveraging among the province’s citizens. Debt reduction should translate to a decline in B.C.’s consumer spending – a key contributor to GDP – as this plays out.

Furthermore, the Lower Mainland is hardly the only place in the country where a home-price retreat could send consumers into retrenchment – it’s only the first. Others may soon switch from party mode to dealing with their debt hangovers. Get out the Pepto-Bismol, Toronto and Calgary.
David Parkinson

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