Here is an article from the Financial Post quoting a recent study prepared by DBRS, the Canadian bond rating agency: Massive drop in housing prices would still leave Canadian households with more equity than debt. I find this one of the hardest articles to read that I have come across in a very long time. Here is a presentation by DBRS on the Canadian housing market. It summarizes their view on where things are. The numbers in the presentation are not supported by any calculations, so it’s not easy to see where they come from.

It’s hard to understand where the average household net worth comes from. Likely a Statistics Canada number. Once again, the average is used rather than the median so the number is heavily impacted by high net worth individuals.

Data from Statistics Canada

Here is a recent report prepared by Statistics Canada on the subject: Annual Household Distribution Tables, estimates of assets, liabilities, and net worth, 2012 to 2015 (provisional estimates). Here is a quote from this report which is relevant to the DBRS comments on the state of affairs in Canada:

Households in the middle of the income distribution have a higher debt burden

Household wealth, or net worth, is not distributed equally by income quintile. Looking at shares for both 2012 and 2015, households in the top income quintile (quintile 5) held more than 45% of total household networth, compared with about 9% for the bottom income quintile. From 2012 to 2015, the share of household net worth remained relatively stable by income quintile.

Households in the middle of the income distribution had a higher debt burden, or debt-to-asset ratio, than those in the top and bottom income quintiles. From 2012 to 2015, households in each income quintile reduced their debt-to-asset ratios by about 1 percentage point.

Households in the bottom income quintile held a higher share of their assets in life insurance and pensions than other quintiles, while all other income quintiles held a higher share of their assets in real estate and a higher share of their liabilities in mortgages.

You can see here how misleading the DBRS report is. It’s really disturbing to see such sloppy analysis. What Statistics Canada is telling us is that household wealth is not distributed evenly and that 45% of it is controlled by the top income earners. Think about that – 45%!!!

So when DBRS says that a significant drop in real estate prices would have a minimal effect on household equity, the statement is at best misleading. 80% of Canadians would be significantly impacted. This is the group that policy makers need to worry about, not the top 20%. In addition, note the comment on the assets classes. The bottom quintile held most of their assets in pensions and life insurance. Financial assets. While the higher quintiles held more real estate.

What the heck

It’s hard for me to understand why DBRS would choose to present the information on such a macro basis without any further analysis. It makes no sense other than it just sloppy. The fact of the matter is that Canadians who cannot afford a real estate price shock will be adversely affected if the market drops 30-40%. It will not impact individuals with exceedingly high net worth. So what’s new about that?