Still not sold that consumer debt levels are unsustainable? We received a couple pieces of mail on yesterday’s article covering unsustainable debt levels. More than a few people would like us to know that financing assets that appreciate is smart. Sure, if those assets have liquidity and you can sell them to someone in the future, that’s smart. Unfortunately, these people have never asked “who the hell am I going to sell this house too?”
You’ll have a hard time finding domestic buyers in Canada, Australia, New Zealand, and the UK. Households in these countries don’t just have unsustainable levels of debt—they are the only four countries in the world where household debt is higher than the economic output.
Consumer Debt Levels Are Higher Than Output
That’s right, citizens (not businesses) of the Commonwealth realm have debt levels higher than the Gross Domestic Product (GDP). Here’s how consumer debt looks in these places:
Canadians are newcomers to the game, despite being the most indebted citizens in the G7 for a few years. The second quarter of 2016 was the first time that consumer debt surpassed GDP. household debt climbed to CA$1.973 trillion (US$1.5 trillion). This contrasts with CA$1.896 trillion (US$1.44 trillion) in GDP output.
Australian consumers have the highest debt-to-income ratio in the realm. They currently have debt obligations of $1.87 for every untaxed dollar they keep. So it’s not surprising that their GDP is 4% lower than their consumer debt. In the second quarter of 2016, household debts reached AU$1.734 trillion (US$1.32 trillion). This was met with only AU$1.668 trillion (US$1.27 trillion) of GDP.
Citizens in the UK have had it bad for a while, with income actually making a negative turn before inflation. Despite elevated asset levels, the financial crisis of 2007 wiped out a good amount of assets. Rather than going bankrupt, those charming Brits took out more debt to pay their bills.
Despite having one of the largest GDPs in the world, the UK still has debts that are much higher. Households accumulated a whopping UK£2.788 trillion (US$3.62 trillion) in debt. The country’s GDP in the most recent quarter was only £1.822 trillion (US$2.36 trillion).
Debt-to-income ratios have exceeded 100% for almost 8 years now, so they knew this one was coming. New Zealand household debts are now NZ$252 billion (US$182.78 billion) for the tiny island. GDP is currently at NZ$250 billion (US$180 billion), not too far below – but there’s no plan to stop the trend.
Household debt compared to GDP, in US dollars.
The GDP Is Mostly Bulls**t Too
Yeah, youth are the future – but not in the Commonwealth. The ideal situation would be to seed industries so future generations can scale output. Instead, these countries convinced people that the physical ground they’re on is the economy, not the people who live on it.
The business of selling and leasing homes is now one of the largest drivers of economic growth. Australia’s GDP growth was 26% real estate services, and another 23% were finance – an industry that’s closely tied to real estate. New Zealand’s growth was 20% real estate in the last quarter, with 9% in financial services.
Canada’s real estate industry was only 5% of GDP growth this quarter, but was up 35% for the year. That’s one-third of Canada’s economic growth around real estate services, not real estate itself.
Lack of Diversification Is A Disaster
Now don’t get me wrong, real estate being an economic driver isn’t a problem by itself. It’s a great industry, pays well, and there’s a low barrier of entry (it’s only three steps to become a realtor in parts of Canada, and the first step being, speak English. This isn’t my joke it’s the economy’s joke). The problem is that these economies are doubling down on real estate. The principal economic growth sector is selling people homes, but they’re purchasing these homes with increasing amounts of debt.
This doesn’t just concentrate these economies into a single, highly vulnerable sector fueled by debt. People that have high debt obligations can’t save, invest in other industries, or otherwise have a healthy financial future. A large number of people are depending on selling their home to fuel retirement now, but what happens if no one wants to buy these homes? Or a better question might be, what happens if millennials can’t afford to buy them?