Modelling debt

One trillion of mortgage asset for Canada doesn’t sound right. Nevertheless, I have already sold all my housing related CDN assets today. Keeping the bank stocks I own for observation, if past experiences is correct, mortgage assets will fall first before it affect the bank stocks by the same amount.

Still, being fully committed to trading, I need to be able to analyze the real impact with real stats. Preliminary back of the napkin calculation says every Canadian is responsible for $33k of mortgage debt. Assuming 1/5 of Canadians are working, it amounts to about $150k of mortgage debt per person. At variable rate of 0.75%, that’s $93 dollars per month of payment. This must be taken as the best case scenario since the assumptions are very straight forward. Real mortgage rate doesn’t work like this.

Matlab is chosen as the language since I will need to plot some graphs and because of the complexity of the equations I will be entering… I need a beer.

1 Monthly payment

The biggest determining factor is whether or not Canadians can in fact service the loan. For this, the monthly payment needs to be determined. Conveniently, http://www.hughchou.org/calc/formula.html have it posted on their website for everyone to find. I decided to create a function that can both calculate US and CDN mortgage payments.

Of course, the first try never runs correctly, a few trial run later comparing to real world data shows that there are some small problems with the formula.  Some correction ensued and now I can move on to gathering data.

2 Data gathering

What I need is the loan origination data of each year, in particular, the type of loan originated, their average interest rate and the total amount of loan for each type. I guess I will begin with CMHC.

Found an interesting link on CMHC (http://www.cmhc-schl.gc.ca/en/corp/li/horetore/rerelisu/upload/Mortgages-and-Housing-Finance.pdf) It asks me to mail or call a place to order the Canadian mortgage finances report (free for Canadian residents). Of course, Once I connected to somebody on the phone, they told me that they don’t have anything under that name. I will try it again tomorrow during business hours to see if I can get someone with more knowledge. I’ll see what I can find out on their ftp site. It looks pretty disorganized and unkempt, maybe I can find some “accidentally placed” documents.

Canequity seems to have the type of information I need. However the site does not display previous year’s data. I need the past 6 years. Will look into ways around it.

3 Parsing Data

Somehow, beer eliminates my ambition, thus rendering programming a pleasurable experience. My investigation brought me to this document about the amount of MBS outstanding: http://www.cmhc-schl.gc.ca/en/hoficlincl/mobase/upload/r303a_english.pdf which suggested some disturbing trend about the MBS guaranteed by the NHA.

I have to rely on the data provided by http://www.caamp.org/meloncms/media/Fall%20Consumer%20Report%20WEB.pdf as it is the only source that is detailed enough. I don’t trust all the data though since some of them conflict with each other, but they should at least be accurate to within the $200billion range.

With the best case scenario, current mortgage holders pay on average $781 per month and your average one earner family earns $40,000 after tax dollars ($3333 per month assuming that they do income splitting to reduce their taxable rate down to %20). Which is more than sustainable. However, we are talking about averages. It will only take a 5% default rate to bring the whole system down. On paper, everything looks fine and dandy, but in reality? We don’t have enough data to form the correct conclusion because I can’t find the status of those people who bought million+ dollar houses in Vancouver because the mortgage on those are $3k per month. Sustainable by anyone earning a salary of $36k or more in the current environment, but will explode the moment the rate jumps by 1%. Can you see how insane this is? A salary of $36k can allow you to buy a million dollar house?

Something good did came out of this though. During my search for the actual data, I found out this interesting thing. Canadian government is $1.2 Trillion in debt. Canadian citizens are $1.4 Trillion in debt. Add the two together and we have a whopping $2.6 Trillion of debt. Every single person in Canada owes $74,285 dollars at a normal 5% compound interest rate, that’s $3714 per year. We all know that the debt will never be reduced (It is the nature of a western society) so we can safely assume that the debt growth will continue (in fact, the projected growth is at 7%). In 40 years, half of what everyone earn will be directed to paying debt… I am assuming 100% of the population participate in the labor force. If you use real world data where only 20% of the people works and earns an average income, Canada will be servicing its debt with everything it earns within 27 years. Ahh, the beauty of compound interest. Be careful, it works the other way around as well.