Does Canada Have a Household Debt Problem?
With the US convulsed by massive defaults on household debt and a resulting banking crisis, the question of whether we are in anywhere near the same dismal state seems germane. The bank economists typically proclaim that all is well compared to the excesses south of the border, but that does seem a trifle self-serving given that they work for the folks pumping out credit.
While we are clearly not in as bad shape as the US, I do see some troubling signs.
As just reported in a study by the Vanier Institute of the Family, http://www.vifamily.ca/library/cft/famfin07.pdf household spending has been rising at a significantly faster rate than household income ever since 1990. Personal debt has jumped from 91% to 131% of personal disposable income. Most of that is increased mortage debt (which has an offsetting asset side, especially over a period of rising prices) but there is a fair chunk of rising consumer debt as well. Canada’s personal saving rate is now a negligible 1%, having steadily declined from 10% in 1990, and soem 100,000 households declare insolvency each year.
It would seem that plenty of post boomer households have taken on a lot of debt (there’s a lot of now dated detail in the most recent survey of wealth), increasing their consumption through credit despite generally stagnant real incomes. Roughly the bottom 80% of households experienced little or no growth of real income from 1992 to 2002, though incomes have bumped up a bit since.
As disturbing, the OECD point out in their most recent Economic Outlook (p.17) that housing prices are even higher in Canada than the US compared to long run averages. The current price to rent ratio is 191 (vs a long run average of 100) compared to 133 in the US, and the price to income ratio is 134 vs 113 in the US. In both cases, we are also significantly above the OECD average. It may be that the long run average for Canada is especially low (given that we do not have tax deductiibility of mortgage interest, as in the US) but the run up is still pretty clear.
Bank economists (I caught Craig Alexander from TD on Newsworld commenting on the Vanier report) point out that interest rates are low and stable, and thus do not amount to a particularly big share of household income compared to the late 1980s at least. But that would clearly jump in the event of a significant economic downturn with increased unemployment, fewer hours of work and paid overtime for the employed, and increased self-employment and contract employment compared to the late 80s. With many younger households needing two full time incomes to service their debt, debt service problems could increase markedly in the event of a recession.
In short, we should worry a bit more about this.