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, 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.


  • Some stats I obtained through Statistiques Canada show that total debt of Canadians (excluding incorporated buisinesses) was 1,1 trillion dollars in 2006. Of that, 300 billion is consumer debt. Yes, this is very worrisome. Let ‘s remember that the debt of the federal government is “only” 470 billion $.

  • No need for the quotation marks around “only”, Mr. Ducasse. The federal government’s debt relative to GDP is EXCEEDINGLY low, as we all know. Isn’t it time for the NDP to return to its natural position of opposition to those timeworn and hypocritical fallacies of ‘sound finance’ and ‘balanced budgets’?

  • Equifax as a credit institution is complete crap. Signing up for a line of credit at 18-21% interest rates is very foolish. This is fine, and no doubt there are administrative costs for financial institutions to offer such secure and cutting edge services. The problem lies in that owning a credit card is considered a prerequisite to attaining a credit rating and thus mortgage, small business loan, etc.

    When I become eligible for a credit card in my teens, I thought I was doing myself a great favour to my future personal finances by not applying for one, and rightly so. Yet credit is the means of production. In Canada, consumers are rewarded for making the very foolish decision to rack up debt at a 20%/yr interest rate. Those who do, get loans. No wonder household debt is a problem; is an institutionalized behaviour.

    As credit is a public good. As home equity is the major asset many Canadians will attain in their lifetime net worths, Canadians should be given a federally mandated alternative to predatory credit cards in building an Equifax credit rating. I’m not against credit cards, I’m against institutionalizing signing up for high interest debt as a precursor to building a net worth. Banks or some crown agency should be offering some sort of graduated and increasing annually, subsidized $50-$5000? annual line of credit as an alternative qualifier to credit cards in building a credit score.
    So Johnny (and every other Canadian in the black) gets a $50 line of credit as an 18 year old. Pays off $53 (needs to come up with an extra $3 if he just leaves the money in the account) within a year. Then his Equifax rating goes up 50 pts and his line goes up to $100 as a 19 year old. Good system? If I were earning US bank CEO compensation as a Canadian bank CEO, I’d force the idea upon the federal government.
    It is probably the most efficient way to begin incrementally imposing a GAI; this step would not require rejigging all other personal transfer payments. This understandable initiative is a much better return even on a banks assets (as opposed to taxpayer’s) than are unintelligible ABCP and subprime loans.

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