Curious how so many of your friends are purchasing million dollar homes? If you’re located in Canada, the UK, Australia, or New Zealand – massive amounts of debt might be the reason. As incomes fail to increase as quickly as home prices, people are borrowing to make up the difference. This has led households in the Commonwealth to assume some of the largest debt loads in history.
Debt to Income Ratios Are Rising Fast
Debt-to-income ratios in these countries are insane, and have been that way for at least 15 years. After 1999, the average household in these four countries had ratios above 100%. This means that they have more debt obligations than disposable income. Here’s a breakdown of how each of these countries looks:
Debt-To-Income Ratio
Canada
Canadians have had their debt obligations exceed their income since 1997. That load has built up to 165% at the end of 2015 – and even higher through 2016. This means that Canadian households had $1.65 of debt for every $1.00 they earned. This has earned Canada the title of most indebted country in the G7, not something to be proud about.
The UK
The UK passed the 100% debt-to-income ratio in 1995, and reached a peak of 173% in 2007. There has since been a pullback, bringing it down to (a still very high) 150%. The UK’s citizens are currently the second most indebted in the G7.
Australia
Australia is the grand champion of debt in the Commonwealth realm. The average household saw debt obligations reach a whopping 187%. That’s and extra $0.87 on top of every dollar they have left after taxes. Ouch!
New Zealand
Since 1998, New Zealand households have had debt obligations above 100%. At the end of 2015, that number reached 161.8%. If you thought it couldn’t get higher, that number is now estimated to be 165% as of the second quarter of 2016.
Worse Than The US Bubble
If you’re a Millennial, you’ve likely heard about the US financial crisis of 2006-8. You also probably know it was the result of a massive amount of debt, fueled by real estate speculation. What you probably didn’t know was how indebted Americans were. The debt-to-income ratio reached a then unheard of 143%.
That’s right, every single country we’re looking at in the realm has a higher ratio. Instead of crashing in 2007, Commonwealth banks decided people just need to borrow more. This way the trend could continue without anyone having to slash prices. People don’t even have to make more, they’ll just lower interest rates to make it cheaper to carry the load.
Not sure what the intended outcome was, but debt levels skyrocketed. The lowest debt-to-income ratio in these countries is the UK – 3% higher than US households at peak risk. The current UK debt levels are now over 30% higher than today’s US debt levels. It could be worse though. Canada is 13% higher than the US peak, and 30% higher than US households today. Doesn’t seem like such a great solution in hindsight, does it?
Importing Capital
Rising debt levels aren’t a bad thing by themselves. People assume debt to finance the cost of assets they believe will rise in value. If that asset rises in value, and you can find a buyer – you have an ideal situation. The issue occurs when a large number of people do this, putting a strain on liquidity.
When this is met with an unrealistic expectation of return, you end up with a crunch on the way out. Already we’re seeing “foreign buyers” rising as an increasing segment of purchasers. This isn’t because Chinese millionaires have always wanted to experience Canadian winters. It’s because locals are starting to get maxed out on borrowing, and we need to import capital to keep it going.
Like the old lady that swallowed a fly, Commonwealth countries are importing buyers now. Governments decided that ramping up immigration of high net worth families from China, India, and Iran is the solution – since they haven’t been impacted by the diminishing dollars/pounds. Unfortunately, this solution to preserve real estate brings up a whole new set of issues. And it doesn’t quite solve the original one.
Financing real estate at these levels just doesn’t make sense. It doesn’t mean you can’t make money, or that there will be a housing crash tomorrow. Far from it. Real estate in these places can continue for as long as people can borrow, or capital can be imported. The question is, if owning your own home is the most lucrative gig in town, how stable is the rest of the economy?
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Amen. The issue with importing capital isn’t importing capital, it’s not having people around that make enough. Canadians are begging to entertain people substantially wealthier than them, not realizing that doesn’t do a whole lot for Canadians.