Saturday, February 20, 2010

Debt

Public debt in the G-7 nations of the United States, Britain, France, Canada, Germany, Japan, and Italy is expected to be over 119% of their combined GDP in 2014.

That, if you are unfamiliar with the concept, is a stunning figure.

Imagine owning a business with gross revenues of $1 million, outstanding debts of $1.19 million, and cash flow from your business to service the debt of about 5% of gross revenues.

This means your company has only $50,000 per year to service the outstanding debt.

If the average interest rate on your company’s debt is 5%, the debt load on your company would be increasing your debt each year. Your repayment of $50,000 would be less than your interest expense about $59,500.

Imagine further that you forgo using the cash from your business for debt payment, and choose to borrow more to keep your debt payments current. Bankruptcy would seem to be only a matter of time for your company.

At some point, finding lenders will be difficult and you would be forced to find funding at significantly higher interest rate levels.

There is absolutely no mystery as to what's coming in the years ahead. And as interest rates rise for sovereign debt, rates will rise for home mortgages.

With that in mind, consider this chart...

$700 a month more in payments at only 5.25%.

That will almost break many who bought the maximum they could afford in the Lower Mainland in the last two years.

A rate of 8% will absolutely push them to bankruptcy.

As always, it's very simple. If rates stay low there will be no bursting of the bubble. If rates go up, the bubble will burst. If rates go up significantly, the world's largest housing bubble will burst in spectacular fashion.

And since the debt situation of the western world virtually guarentees a future of significant rate increases, I maintain my prediction of a minimum of a 40-50% drop in the price of a single family home on the wet coast.

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2 comments:

  1. good one.. keep up the good work

    ReplyDelete
  2. Yes, another good one. Every post is a pleasure to read. Thanks for providing great information on this blog.

    ReplyDelete