519-646-2222Bankruptcy Filings Are Way Down
For the year 2020 bankruptcy filings are way down, in fact insolvency filings dropped by about 32% relative to prior years. Ironically, I predicted this would occur in July of last year, after a local newspaper reported that we would be facing a tsunami of bankruptcies. I had presented my argument on LinkedIn (which I am no longer on) and was hit by a barrage of naysayers within the insolvency community who truly believed we would see a significant increase.
Insolvency filings, up to a point, are actually a positive sign of a vibrant lending economy. After all, not everyone who borrows money will be able to repay their debts in the normal course. There are multifarious reasons why people end up in default. Many times the reasons are directly attributable to high-risk lending policies, particularly in relation to high interest-bearing products, such as credit cards. Additionally, there is a whole matrix of societal conditions that leave debtors stranded. For example, job loss, business failure, marital or relationship breakdown, illness, death in the family.
As we can see there are many factors that are completely out of a debtor’s control. Relief through an insolvency proceeding is, at times, necessary to allow debtors to become rehabilitated and returned to being economically productive members of society. Without access to insolvency filings people would simply languish in ever increasing levels of debt with no hope of relief.
Without reiterating why, I made the prediction I did (you can always read the earlier blog by following the links above) I will discuss my thoughts on how the economy is evolving for the coming year. Now, please remember these are ideas and thoughts that are fluid as things will change as time moves ahead. The CERB is supposed to end in September, and to be fair it should have ended a long time ago. It is very clear from the science that the virus is now endemic, and we simply have to learn with it in the same we have othersimilar, mild flu-like viruses.
The CERB
The CERB rollout was without a doubt a clumsy and costly socioeconomic experiment. The government on one hand should be praised for the speed with which they responded to provide financial aid during their, self-created, lockdown crisis. But they should also be admonished for their constant politicising of the funds. The federal government attempted to pass a Bill in June of 2020 that would have contained severe punitive measures for unqualified funds recipients. The Bill was, in my view, appropriately, defeated at first reading. The government, much later, apparently, directed the CRA not to pursue collection of amounts that were paid to unqualified recipients.
Since there is no longer a “Chinese Wall” between most government departments, information can more easily flow, and the CRA has been well positioned to assess qualifying criteria for CERB applicants. Nonetheless, there were multiple reports of unqualified recipients including, people who were still working, people who had never worked, people receiving other government benefits, high school students, and out and out fraudsters. The government could have, and should have, filtered the applicants far more carefully than they did.
The government estimated that some 8,900,000 unique applications were made for the CERB, some received short term benefits while others have continued to receive funds, and the most odious of all double dipped receiving funds from both the CRA and Service Canada (who were each administering the distribution of monies) simultaneously. The CERB, following extensions, is supposed to end in September of 2021, at which time the lower end of the socioeconomic spectrum should rebalance, back to the way it was, to some extent. The family of four discussed in our earlier blog from June of last year will have to learn to live with less, again.
When people, accustomed to living on low income, started to see their incomes double, triple and even more, and were told, by Theresa Tam, the plague will infect millions, and kill hundreds of thousands of their fellow citizens, they spent money. They paid up their outstanding payday loans, paid off their finance company accounts, bought new furniture, ate out more and ordered a whole of stuff off Amazon. But how long can the government (effectively) subsidise large corporate interests without seeing a revenue return in the form of taxation: Be mindful, as you contemplate the answer to that rhetorical question, that big business does not pay its fair share of taxes, in any country. It is small to medium sized businesses and individuals who contribute most to the tax base. Small business, generally, in Canada has taken a tremendous hit in the last year and a half, with fewer sectors flourishing.
Universal Basic Income (“UBI”)
The government has floated the idea of a Universal Basic Income which is a laudable idea, but if not properly managed it could (like the CERB) be unrolled in a way that would provide less benefits to the economy. If it is done properly, it should only become a permanent benefit for people who are permanently unable to work. Arguments have been made for years, and it is hard to disagree, that our welfare system needs reform. People living on welfare are essentially trapped and welfare is not providing the supports that are really needed. Try living on less than $700 per month and you will quickly learn how hard, frustrating, mentally fatiguing and disorienting it is to do anything but feel depressed, disenchanted, lonely, isolated, and prone to resorting to the use of substances to hold it together.
A well rolled out UBI would not provide a permanent support system for any but those who really have no other options. Instead of relegating people to poverty it could be used to help them bridge a gap between opportunities. It could, quite literally, mean the difference between having to choose between paying rent or buying groceries, and living a more stable lifestyle. If improperly made available it will provide a huge disincentive to work in lower paying, entry level positions. After all, if you can receive $2,000 per month for staying home, or go to work everyday of the week for $2,300, why would you go to work:
The Housing Market
The housing market has, and will continue to have, a tremendous impact on our future economy in many ways. First of all, the most recent housing bubble has provided most home-owners with a sudden equity build-up that, can be and has been, leveraged for debt management and other superfluous expenditures. Many markets have seen a doubling of housing values over the last four years and an explosion in the use of secured lines of credit (up 60%) as well as mortgage funds (up 42%). The short-term result of this stimulus has been extensive, allowing people to buy goods and services they otherwise either could not have afforded, or would not have purchased.
Additionally, billions of dollars in mortgage fees, legal fees and real estate commissions have been flowing into the economy. In June of 2021, according to a report from Re/Max, the average sale price in London, ON, was $623,600 with 835 units being sold in that month. That is a total sale price of $520,706,000 of which an average of 5% is paid out in real estate commissions (according to CREA) for a total of $26,035,300 for that one month. According to LSTAR there are about 1,850 Realtors on the board. If commissions were (they are not) equally split, each realtor would be paid about $168,877, plus HST, per year. On top of that financial benefit to the local economy, mortgage brokers have also seen a banner year and so have real estate lawyers.
A caution, however, from earlier Re/Max market reports, is that the average price has dropped it was $635,00 in April of this year. While the authors are not discussing this, relatively small percentage change, it did happen. It is too early to tell if this is a sign of a correction coming or just a small change in the local market. A protracted decline in sales activity or prices would certainly have an impact on local economies as high-income earners, such as realtors, do buy local goods and services and frequently invest in local communities. On the upside, an incremental correction may stimulate activity by making housing more affordable to entry level purchasers and increasing volumes of sales and trades.
When we look at activity in other markets we see some interesting outcomes, London, UK, for instance has had explosive growth over the last several decades. In fact, today, you could purchase a two-bedroom apartment for the low, low, price of $9,515,000. Begging the questions “how does this market continue to stay afloat?” and “Who on earth can afford to pay millions of dollars for a two-bedroom apartment?” The answer is that people who were already in the market have been able to stay in the market. As your house value increases you can sell and move up, or around, within that market space. However, unless you are extremely wealthy you will not be able to enter that market. The point being that in the face of explosive growth in prices the market may be sustainable, albeit prohibitive for entry level, would-be, purchasers.
Summarising
Without delving too much deeper, I will start to summarise all of that information, and the impact of possible changes on peoples’ reactions to dealing with debt.
If the government continues to give money out to everyone, regardless of whether or not they are working or otherwise socially contributing by producing goods and services, the tax base will be eroded and we will enter a period (if we have not already done so) of hyperinflation. The government already appears to be following a fiscal policy outlined by the World Economic Forum (“WEF”), which is basically one of printing money. Economists have warned against this protocol, suggesting that such a practice will lead to increased personal debt and hyperinflation. At some level, the descent into unmanageable debt must be slowed if not reversed.
Individuals have continued to pile on debt at unprecedented levels and need a viable solution, before they become overwhelmed. According to the previously cited Huffington Post article, some economists are predicting an increase in interest rates – that impact will inevitably force consumers to seek solutions other than further consolidations. In any event, lenders will become reticent to assume more risk than necessary. We have not seen a decrease in household debt for decades, and recent debt levels have increased tremendously, although, as previously noted, the source of debt has largely shifted from credit cards to secured lines and mortgages. But those statistics may be misleading – consumers are not, directly, using secured lines of credit or mortgages to shop on-line, even though that is where their purchases end up.
If the housing market corrects, either with a significant drop in prices or an increase in mortgage rates, we will undoubtedly see a corresponding uptick in insolvency filings. Similarly, should government supports be replaced to exclude people on other benefits and people who are able to work we will experience a slight uptick as individuals resume using unsecured debt to pay for lifestyle choices that exceed their incomes. In all likelihood, the government will move forward with the UBI, improving the lot for some people stuck at the lower end of the socioeconomic spectrum, but properly rolled out that will not protect people from their own poor economic choices.
We have had housing market booms and corrections in the past, usually they take the form of protracted stagnation, perhaps that will happen again, with prices remaining stable for a period of 5-10 years before any signs of growth appear again. Consumers, with less available credit, from leveraged assets, and without government handouts, will have less carrying capacity and will find themselves having to face the enormity of the debt loads they are carrying. That will spark a return to more “normal” levels of insolvency filings. It’s important also to realise that insolvency rates have for decades run at rates lower than the default margins set aside by major lenders. Assuming the purported Schwabian coup has run its course (although the behaviour of the federal government leads to speculation that it has not) and the government does not implement some bizarre economics experiment, there will be tough times ahead, but no tougher than some that have been experienced in the past.
Predicting the direction the economy will take in the coming year, will be far more challenging than it was last year. Governments around the world need to start taking heed of medical experts and scientists instead of big tech and corporate narratives. By now, we surely all agree, the lockdowns must come to an end and the sooner the better, and we need open and honest discussions about what happened, how it was handled and the repercussions on global economics and lifestyles.
We are steadily inching towards a very new form of economy that is leaving cash virtually stranded. China has already stepped forward with its own virtual currency and central banks around the world, including Canada, are following suit. Private blockchain currency systems are not likely to remain in place – we all know bankers do not like competition. Nonetheless, credit will remain a part of the new digital currency enterprise(s) and people will need solutions to debt problems. Some of the solutions of the future may be tied to social contributions as well as to repayment plans – in some senses perhaps invoking images of the debtors prisons of past centuries – but that is another blog topic for another day.
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