Consumer "net debt" not so scary

I read in one of my daily papers that consumer debt is now the big risk to the economic recovery. Although I didn’t know that all of the other risks were now behind us, I thought it would serve you all well to do a bit of primary research into the matter. All I have to go with are the banking figures, but they’ll be directionally indicative.

Here are some number to reflect upon from the Bank of Canada (July 2007 – April 2009):

Personal loans: $42.7B – $48.5B ($5.8B increase)
Credit cards: $42.6B – $51.7B ($9.1B inc.)
Personal lines of credit: $133.9B – $181.0B ($48.1B inc.)
Other: $20.5B – $20.8B ($0.3B inc.)
Mortgages: $449.2B – $437.7B ($11.5B decrease)
Non-residential: $20.5B – $25.2B ($4.7B inc.)

(note: the mortgage figure may well reflect bank balance sheet reductions and not consumer mortage paydowns, so using the September 2008 figure of $486.1B is likely more representative {a $37B increase}.)

One has to make some assumptions about the true impact of CMHC’s mortgage program. All told, consumer obligations to banks increased by ~$105 billion over two years. The big jump comes in the Lines of Credit; likely the new invention of secured line against your home – which is how the banks get you to always keep your mortgage outstanding.

On the asset side, here’s the picture for personal deposits:

Chequable deposits: $134.7B – $166.6B ($31.9B increase)
Tax sheltered sav. deposits: $13.6B – $21.7B ($8.1B inc.)
Other deposits: $77.3B – $95.9B ($18.6B inc.)
Tax sheltered fixed term deposits: $78.6B – $89.6B ($11B inc.)
Other fixed term deposits: $208.8B – $253.6B ($44.8B)

In total, personal deposits increased by $114.4 billion over the same time frame.

Against an estimated $105B increase in debt, $114.4B of personal deposits should infer that Canadians actually have about $10 billion of less net debt with their banks than they did in July 2007.

The chartered bank data doesn’t capture everything, of course, and the Bank of Canada has built a tidy sheet on their site that explains the entire universe of cossumer debt, including non-banks and NHA mortgages. But it doesn’t give us the deposit data, so all we can extrapolate is the true change in the mortgage figure over the past 12 months. If one includes every category, mortgage debt increased by $71B over the past 12 months. Back out my inflated $48.5B mortgage swing, and debt increased by about $22B over 12 months, which means net consumer debt increased by about $10B, rather than dropped by $10B.

Which represents less than 1% of outstanding consumer debt (as at April 2009).

According to the BoC’s omnibus data, consumer debt increased by $101B over the 12 months ending in April. But bank deposits and the like increased by at least $60B during that period. Even a $40B net swing doesn’t mean much against $1.33 trillion of total consumer debt.

Heck, US$40B is what it took from the TARP to keep Citibank (C:NYSE) afloat.

There are other metrics to consider when gauging consumer pain, such as debt as a percentage of annual salary or net worth. And the drop in home prices means the primary household asset is down at least 10% in value of late, even though the face value of the mortgage is likely flat.

However, may be a silver lining. Given the year we’ve all had, it would seem odd to declare a crisis over what looks to be a 4% increase in household debt.

MRM