L’endettement augmente trois fois plus vite chez les aînés

Le deuxième article est particulièrement intéressant, si les économistes sont mes souffres-douleurs, certains par contre sont excellents.

Extrait de : L’endettement augmente trois fois plus vite chez les aînés, Agence QMI, Argent, 11 octobre 2011

Si les Canadiens les plus jeunes présentent toujours l’endettement le plus important, c’est dans le groupe des plus âgés qu’il augmente le plus vite, selon une étude des Services économiques TD.

Depuis 2007, la dette, qu’elle soit relative (ratio dette/revenu) ou absolue (encours total), a gonflé chez toutes les classes d’âge, mais l’étude souligne la rapidité avec laquelle elle s’est accumulée chez les plus de 65 ans.

La dette des retraités et des travailleurs âgés a augmenté trois fois plus vite que la moyenne, selon Derek Burleton, vice-président et économiste en chef adjoint à la Banque TD.

Il s’agit d’une tendance inquiétante, a-t-il ajouté, même si les Canadiens les plus âgés disposent de certains atouts comme des soldes débiteurs peu élevés et des actifs plus importants.

« Le fait est que les Canadiens partent à la retraite avec plus de dettes pose des questions sur leur sécurité financière à long terme »,

 a expliqué M. Burleton.

L’accumulation de la dette s’explique principalement par les investissements immobiliers, selon l’étude. De nombreux Canadiens se laissent en effet tenter par des taux d’intérêt peu élevés et la promesse de gains importants.

Il peut être bien sûr pertinent de recourir à la dette pour accroître ses actifs. Reste que les Canadiens de 44 ans à 64 ans et leurs compatriotes de 65 ans et plus constituent les seules classes d’âge où la croissance de la dette a été plus rapide que celle des actifs, a ajouté Derek Burleton.

Les aînés dépensent aussi leur argent pour s’offrir des objets de luxe. L’étude montre par exemple qu’ils ont tendance à acheter plus de voitures ou bien à acheter des véhicules plus chers.

Si le rythme d’accumulation de la dette se poursuit chez les plus âgés, leur niveau de vie pourrait en souffrir. Cette tendance pourrait aussi aggraver la volatilité des marchés financiers, le déficit des caisses de retraite et peser sur les régimes de pension d'employeur, selon Services économiques.

Extrait de : TD on debt in Canada; OECD leading indicators signal Canadian slowdown, Ben Rabidoux, Economic Analyst, Octobre 11, 2011

TD on Canadian debt levels:

The must-read report of the day comes courtesy of TD economics and is titled, "Canada's Aging Debt Burden."

It's well worth the read in its entirety.  Here are a few snippets for the lazy reader...

On rising debt burdens across age cohorts:

There has been much ink spilt about the growing vulnerability of Canadian households (and the overall economy) as a result of rising household debt. On a positive note, the fact that Canadians in older age groups are significant contributors to the run-up in debt could lessen the risk of a severe balance sheet adjustment down the road. This is because older Canadians are better positioned to withstand an unanticipated event, such as a sharp decline in home prices or disruption in income, since they tend to have lower debt balances and larger asset bases which to fall back on. At the same time, however, the fact that Canadians are entering retirement with more debt raises questions about their long-term financial security.

Endettement Canadien par age

The idea that it is somehow comforting that the older cohort is also bulking up on debt is completely ridiculous.  Our debt addiction is what's funding a large portion of consumption here in Canada.  As a proportion of GDP, consumer spending is up from its long-term average of 58% of the economy as of 2000, to 64% today.  Cheap credit is extended to anyone with home equity via a home equity line of credit.  It doesn't matter if you are house poor and 30 or financially wealthy and 65; Very few people pull home equity to fund consumption in a weak housing market.

Similarly, it doesn't matter how wealthy you are; When a house is your largest asset, and its value declines, you lose confidence, and wealth effect spending dries up.  To say that this is problematic for the broader economy is an understatement.

While the report focuses on the pace of debt accumulation by the 65+ cohort, I am quite interested by the magnitude of the average debt burden of the 25-44 age group.  The fact that the average debt burden of this cohort is 150% of PRE-TAX income should concern us.  When consumer debt levels are low and stable, it allows for a consumption pattern which peaks around the age of 47 for the typical Canadian. 

But when consumer debt is high, it means by necessity that future income must be diverted away from consumption and back towards debt repayment.

Similarly, it suggests that consumption has been pulled forward as debt spends just the same as income.  It's this looming debt overhang that all but assures that the next 10 years in Canada will look nothing like the last, and that extends from economic growth to house price gains.  They will all be remarkably subdued relative to the past decade.

On 'more sustainable' growth in mortgage debt:

A closer look shows that a large part of the growing debt burden among older Canadians reflects investment in real estate. Indeed, the trend toward real estate has been more prominent than average among the 65+ group, where average holdings have doubled since 2002. Like others, older Canadians have been lured by the attractive combination of low interest rates and home price appreciation. And for those in or close to retirement, low returns on interest bearing securities and sharp equity losses in recent years have provided an added incentive to diverisfy portfolios into real estate.

This is a great example of the mentality that causes folks to chase trends.  It's why the average investor massively under-performs the markets.  We have a terrible propensity to chase the latest 'hot' investment.  The fact that these 'investments' are often yielding pitiful cap rates compared to many stable, profitable companies with little or no debt should cause us to question the investment 'worthiness' of these assets.

We’ve argued in earlier reports that debt used to fund asset accumulation (rather than consumption) is more sustainable.  That said, those aged 44-64 and 65+ years are the only age groups where debt growth has outstripped asset growth over the last decade. For those aged 65+ years, debt grew at a pace that was double that of assets. Accordingly, most broad metrics of household financial health – ratios of debt to-income, debt-to-assets and debt-to-homeowner’s equity– have been on a deteriorating trend since 2002.

Let me see if I understand this correctly:  Debt accumulation, which has massively outpaced income growth and is inarguably unsustainable at its current trajectory, is less worrisome if it is used to buy an asset whose price rises or falls based on availability and cost of said debt?  Try telling that to folks anywhere in the US.  Or the UK.  Or Australia.  Or Victoria.  Or Calgary.  Or Toronto in the early 90s.  It's a ridiculous statement.

Nevertheless, here's what it look like.  No shock that mortgage debt has doubled since 2002.  This is not a market driven by income gains, economic growth, or population expansion.  It's driven by the debt expansion so clearly evident in the chart below.

Canadian Household debt

Note also the massive expansion in lines of credit.  These are the babies that are funding all sorts of additional spending in the broader economy as people access home equity on the cheap in what is called "wealth effect spending."  You'll see that it's most pronounced in the 45-64 and 65+ age group....the ones with the most home equity against which to borrow.

This is the cocaine addiction that plagues our economy.  It provides a short-term 'high', boosting consumption, economic output, and employment in the short term, but lasts only as long as confidence and home equity is increasing.  It is the hidden danger of the housing bust and one reason why such an event would most certainly be associated with a nasty recession.

Yet more evidence of wealth effect spending and the conspicuous consumption culture:

You can read about wealth effect spending and its role in the broader economy here or here (or read the recent Globe article about it here).  Conspicuous consumption and its role in the new and prevailing consumer mentality in Canada can be read about in this post.

These are important concepts that help explain the increasingly prominent role of debt-driven consumer spending in Canada.  It was not lost on TD, who noted the following:

The data indicate that Canadians on average have either increased the number of cars they own or are driving a more expensive car. In 2006, the average household had automobile assets worth $15,000. The comparable figure has since increased to $20,000. During this period, the cost of owning or leasing a vehicle has actually fallen more than 10%, so rising prices is not an explanation.

This is not a surprise.  Credit bubble have a way of transforming a society.  They change our expectations and consumption patterns in the near term.  They create the illusion of great wealth and prosperity.  Despite the fact that this 'prosperity' is driven by an unsustainable debt pile-up and the illusion of paper 'wealth' gains, people aspire to live that 'prosperous' lifestyle.  At least for a while.


The best line in the report is in the conclusion.

Household debt in absolute terms and relative to income have been rising across the age spectrum over the past decade.  This highlights the growing vulnerability of household balance sheets to unanticipated events. While much of the debt has been used to finance an offsetting real estate asset, the truth of the matter is that asset values go up and down in value but debt only declines when principle payments are made.

Surely they don't mean that house prices go up and down.  That can't be