The Canadian economy is a windshield looking for a moose
The Canadian economy is a windshield looking for a moose.
In June 2012, Finance Minister Jim Flaherty reduced the maximum amortization period to the traditional 25 years, “aimed at reining in a hot housing market and ensuring Canadians aren’t taking on more debt than they can afford.”
That sounds prudent but wait…
Canadians taking on more auto debt over longer terms –“The single biggest driver of increased personal debt in the past decade has been automotive-related lending, Hatch said, adding that even car buyers with cash are tempted to put less down, because financing is so cheap. J.D. Power estimates that 58 per cent of car buyers opt for terms of six years or longer, much more than the three or four years that used to be the industry standard.”
Extending the financing term creates an “easy credit” environment, as more debt can be incurred by consumers when it is financed over longer terms.
Of course, this is great in the moment but it creates future problems:
1) It pulls forward consumption. Debt is a way of spending money you don’t have today but you will have in the future. In essence, you are spending future money so you are pulling forward consumption by spending that future money now.
The problem for the auto industry is that they are sacrificing sales three years from now by selling a more expensive vehicle today financed over SIX years – sure, the auto industry is getting more money today but they get nothing in three years. Very short sighted, as, unlike the housing industry, vehicles are not considered “investments” and there is no “equity” to pull out of them through selling them or refinancing the debt. If easy credit comes to an end, possibly due to increased interest rates on the horizon, expect the auto industry to be hit HARD.
2) Easy credit financing leads to increased price inflation.
I looked at that in The Cost of living in 1938 and in 2013 “As you can see, the most significant cost increase over inflation is housing and tuition – both exist via easy credit.“
Expect to see price increases in new vehicles in excess of inflation.
3) Canadians are taking on more debt than they can afford.
Canadian household debt ratio climbs to new high: report “Household debt in Canada hit a new all-time high in the just completed third quarter, but the tiny increase from the previous quarter suggests Canadians are reaching their limit on borrowing.“
Apparently there is no borrowing limit, you just need to extend the financing terms.