Thursday, January 21, 2010

National bankruptcy rate hits record high

Today the Office of the Superintendent of Bankruptcy Canada released the November insolvency figures. We had touched on this topic a couple months back, but largely focused on Alberta, today we're also going to add the nationwide numbers into the mix. We'll start with Alberta again though and make you wait for the good stuff!

Alberta - Consumer Bankruptcies
This is the total number of declared bankruptcies in the province in any given year (and since it's only through November 2009, I've done a projection for December). As we can see here depending on just how the December numbers turn out we will either set an new high or come very close, at least in nominal terms. Though since the population has grown since '96/'97, proportionately we're not as bad off, as we'll see in the final graph.

Canada - Consumer Bankruptcies
Now we have a look-see at the national numbers, and we can see we are already WAY beyond any previous highs. Even through just eleven months we've already had over 18,000 more bankruptcies than 2008 (which was the previous high water mark), so once the December figures come in we'll likely be in the 25-30K range.

Again though, these are just nominal figures and to get a true idea of the significance of the problem in historical terms we must account for population changes. For our purposes we'll adjust it to a rate of bankruptcies per 1,000 people.

Bankruptcy Rate
Thus we have this (note: there are actually two of those dotted lines representing averages, they're just so close they appear almost as one).

For Alberta we can see we're obviously much above the rate during the boom years, but still within a range that was normal during most of the period from '94 thru '04. While well above the long-term average, that average seems heavily skewed by the much lower rates from the 70's and 80's, which it would seem are probably not all that relevant nowadays, for whatever reason. So, for now in Alberta at least it seems we're still doing alright on the insolvency front.

The national rate on the other hand has blown way past any prior record highs, and now sits around 3.46 (previous high was 2.85 in '97) including the December projection. Just through November alone the number is already at 3.21, so even if there was a miraculous December and not a single further bankruptcy, we're already well above any prior highs.

Given the economic crisis and recession such spikes in '09 are not unexpected. Going forward we can expect to see comparatively high levels of bankruptcies as even when the economy starts to recover, the jobs lost will not return nearly as fast as they were lost. Beyond that, many consumers have been burning through their savings and/or relying on EI to keep their heads above water, but those eventually run out. So the full effects of the recession have not yet been realized.

We know that bankruptcy rate and arrears/foreclosures are not particularly highly correlated. Regardless, high and rising levels of insolvency is obviously a sign of a weakening consumer base, and thus should have some effect on housing prices. So it really begs the question of how sustainable is a 20% increase in national home values over the very same period unemployment rose in a big way, incomes dropped, and insolvencies hit record highs.

It's really a testament to just how powerful the influence of interest rates have on real estate values. Every other fundamental factor at best held, and for the most part got worse. This last year has been as good a change to observe the effects of interest rates in a vacuum as could ever be practically achieved.

Of course the really scary part is that from here, interest rates have no where to go but up.