Sunday, June 24, 2012

The United States Relinquishes Debt’s Dubious Crown—to Canada

It is not often that one hears praise for the economic behavior of the United States and its citizens. Two recent articles indicate that the country is capable of sober and responsible actions—at least for short periods.

The McKinsey Quarterly provided a short piece highlighting the progress of the US in decreasing the level of the household debt it is carrying: Global deleveraging scorecard—US takes the lead.

"Americans steadily increased their debt levels for a good six decades, but it wasn’t until the turn of the millennium that the ratio of household debt to income really soared. Yet by the second quarter of 2011, three years after the start of the global economic crisis, the US ratio had fallen 11 percent from its peak. At the current rate of deleveraging, it would return to trend as of mid-2013...."

McKinsey uses Sweden as a benchmark. Sweden experienced a similar financial crisis in the 1990s.

If Sweden represents a historical norm then there is still a long way to go, but at least we are well on our way and have managed to get this far without falling back into a recession.

An article in The Economist illustrates the different paths being taken by the US and Canada since the Great Recession: Canada’s housing market: Look out below.

"When the United States saw a vast housing bubble inflate and burst during the 2000s, many Canadians felt smug about the purported prudence of their financial and property markets. During the crash, Canadian house prices fell by just 8%, compared with more than 30% in America. They hit new record highs by 2010."

World economic conditions kept interest rates low in Canada, feeding a very hot housing market.

"In response, Canadians have sought ever-bigger loans for ever-costlier homes. The country’s house prices have doubled since 2002."

"Speculators are pouring into the property markets in Toronto and Vancouver. "We have foreign investors who are purchasing two, three, four, five properties," says Michael Thompson, who heads Toronto’s economic-development committee. Last month a modest Toronto home put on the market for C$380,000 ($381,500) sold for C$570,000, following a bidding war among 31 prospective buyers."

Riding an increasing real estate market requires taking on additional debt.  Canadian households have been doing this with gusto, although not as wildly as the US did at its worst.  Nevertheless, the US has finally been exceeded in the debt race.

Accumulating debt in order to follow escalating housing prices has traditionally led to a bursting bubble. While not inevitable, it is certainly a concern.

Meanwhile, we, south of the border, are happy to relinquish the debt crown to our neighbors.


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