Much of the increase in house prices and household debt in the 70's was due to inflation. Inflation has been quite muted in the last 20 years relatively speaking.
Lower interest rates have helped Canadians accumulate more household debt over the last 20 years, but especially in the last 8 years. This coincides with the lower of amortizations, easier access of HELOC's and lax attitudes toward debt. It is of no surprise that many people are monthly payment consumers. And this rise in household debt is closely correlated to the explosive growth of the FIRE sector in the National Economy. I will touch on this tomorrow.
That's interesting.... this tells me that we were on a crazier ride in the 70s than we are now....
ReplyDeleteFrom 1971-1981 House prices increased 317% and household debt increased 471%.
From 2003-2010 house prices increased 163% and household debt increased 287%.
However, we saw a correction in the early to mid 80s.... will we see another correction like that?
Saskaboom,
ReplyDeleteinflation made up much of the increases in the 70's. If I get a chance I may add that to the graph.
1971-1981 total inflation 140%
2003-2010 total inflation 13%
This is pop growth
1971-1981 pop growth ~13%
2003-2010 pop growth ~8%
I have now added inflation and interest rates to the post and have stumbled upon on how the FIRE sector has experienced significant growth with the rise in household debt. That will be tomorrows post.
ReplyDeletePinning it all on inflation doesn't hold water. Incomes went up in the 1970s as well yet household debt increased significantly. Incomes over the last 5 years in Saskatchewan have outpaced inflation.
ReplyDeleteThe population of Saskatoon has increased by more than 10% since 2006 and that does not include increases in the suburbs...
Saskaboom,
ReplyDelete"Pinning it all on inflation doesn't hold water."
Have you looked at how wages have increased from the 1970 to the 80s compared to the last decade?
For example the average weekly wage in 1971 in Canada was $126. By 1975, it was $203. By 1977, it was $277.
By 1985, the average weekly wage more than TRIPLED from 1970.
In the last 15 years the average weekly wage has increased by 42%.
Even though household credit increased by a huge amount in the 70's so did wages. That is why the household debt to income ratio did not move much until the mid 80's.
From the mid 80's to now, Canadian household debt to income has increased from 50% to about 150%.
Incomes over the last 5 years in Saskatchewan have outpaced inflation 22% to 9%. According to TD Bank household credit growth in Saskatchewan has been above the national average.
Because of you, I found some more great info. I am going to do a wage vs mortgage debt vs house price graph from 1970-2010, watch for it.
Well then I guess you'll also need to factor in all the changes in the cost of everything.... and I don't mean based on inflation, I mean based on what things cost then compared to now....
ReplyDeleteIn the late 70s these were typical unadjusted prices:
- washing machine $500
- Drier $300
- Dishwasher $500
- Steel belted radial tire $60
- 20" colour TV $500
By the mid 80s a "fancy" self-cleaning oven was about $1000.
In 1989 I bought my first CD for $25. Now I can get 3 albums online for that price. Minimum wage at that time was about $4/hr...
Exactly how do these stats take this into account... graphing the data makes it look nice. But how does it show the reality.
Again, I'm not justifying the increases in house prices in 2007-2008, but using all these "indices" to make comparisons over such different times.... doesn't make sense.
My biggest pet peeve with financial stats is that analysts always try to compare different eras in "equivalent" dollars. Neglecting the fact that priorities of our society and technology has changed drastically. Applying indices over such long periods of time, while good for identifying trends, does not mean anything unless put into proper context.
Saskaboom,
ReplyDeleteI see what you are saying.
Electronics and vehicles for example are lower in inflation adjusted dollars now compared to a generation ago.
At first glance, one would expect the average Canadian to have a higher savings rate but it has plummeted because a large percentage of working Canadains live cheque to cheque. Make no mistake, housing is a big reason for this. But so are attitudes and knowledge towards debt and today's generation of "gotta have it all now". We consume way more "stuff" than ever before.
A generation ago, it was not uncommon to have 1 parent at home to raise the kids. I read a stat the other day that 85% of all young families in Canada need to work just to make ends meet. Just one reason why Saskatoon has a waiting list for daycare.
"but using all these "indices" to make comparisons over such different times.... doesn't make sense."
This I believe we differ in opinion.
I believe using indices over different time periods makes MORE sense and so do the guys who
who identified the global housing bubble, Shiller, Baker, Mish, Keen to name a few. I have read their reasons why the fundamentals do matter and how housing bubbles can be spotted.
With all that said, the increase in house prices in just the past half decade has followed the increase in debt, sure wages, GDP and population growth helped a little bit but do not explain the total increase.
The biggest question is "can this all be sustained?"