Monday, January 20, 2014

Canada's Household Debt-To-Income Ratio, Price-to-Rent Ratio and Real House Prices Are Flashing Warning Signs

Alert: Canada's household debt-to-income ratio, price-to-rent ratio, and real house prices have been diverging with the US since 2006-2007 (right before the U.S. financial system collapsed). Household debt-to-income ratios in the US and Canada rose in tandem from 1990 to 2007. Can anyone explain why these massive divergences are normal right now? These charts are from BCA Research's blog. It looks like Australia is in the same boat (hopefully commodities don't see a hard landing).

Source: BCA Research's blog (added the black vertical line)

Here's more on Australia. According to a July 2013 Common Wealth of Australia report, household debt trends appeared to be under control. But a 2012 BIS report showed that Australia's debt service ratio was at a level that caused a banking crisis in the US UK, Italy, Finland and South Korea. At that time, Australia's household debt-service ratio was actually higher than the US's DSR was before its banking system collapsed. But Australia's business sector debt service ratio was at historic lows.

Source: BCA Research's blog

Here is Canada's household debt-to-income ratio versus the US's since 1990. This a crazy divergence.

Source: BCA Research (via @Econompic) (black vertical line added)

So, in my opinion, get ready for a house price correction in Canada. Here is why condos are overvalued. Housing market corrections in Canada and Australia will probably lead to recessions. I bet they will be fueled by Fed tapering/tightening and China's deleveraging.

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