Consumer credit

A good comment posted on a blog I frequent:

A friend of mine is heavily involved in the consumer credit business here in Canada and he’s seeing early warning signs that the Canadian economy is grinding to a halt.

Consumer credit drives a surprisingly large amount of business here in Canada. For example, if you were to walk into the showroom of a mom & pop snowmobile dealer in Saskatoon and you bought a snowmobile on a “plan” it very well could be my friend who is financing your purchase plan (y’know, you pay 10% down and you agree to make a low low monthly payment for three years… that’s known as buying on plan).

You might be surprised by what you can buy on a purchase plan. In addition to the obvious ones, like furniture, cars, motorcycles, snowmobiles etc. you can actually have dental work financed, or you can have elective medical treatments financed (can you say “augmentation”).

Anyways, apparently in the past month in particular, buying on credit is suddenly freezing up solid. With the economic downturn you might think the banks (who are his competitors) would be lending like crazy at the outrageous rates that these “buying plans” charge. Well guess again. He tells me that all of the major players in the consumer credit game in Canada are getting out of the business.

And the list includes some massive entities… like GE Capital Canada, HSBC Bank, etc.

The reason even major financial entities like GE Capital are having to quit the leasing and consumer credit business is that they can no longer “securitize” any of their loan portfolios. Securitize is a five dollar finance word for sell. The industry has historically been driven by the ability to sell some of their loan portfolios.

Well it’s completely stalled. So GE Capital Canada and other majors have closed their doors to new business.

So what does this have to do with Vancouver real estate you ask?

It’s like this. My friends customers (the mom & pop snowmobile store, or the the dentist, or the plastic surgeon) are seeing huge declines in their sales levels because their businesses are now “cash only.” As a result, their businesses are hurting. The mom & pops will have to lay-off staff, and cut costs… and it all becomes a vicious cycle.

Canada is not going to be protected from the economic downturn.

Vancouver real estate prices are already inflated in relation to Vancouverites’ average salaries and rents. On a long term basis, real estate prices are driven by the economic circumstances that prevail in the local market. High rents = high prices… and low rents = low prices. Well incomes and rents will be under pressure as the Canadian economy fails… and real estate will fall with the economy.

The weight of gravity on the Vancouver real estate bubble is growing.