Household debt going from bad to worse
Canadians are now more indebted than either Americans or the Brits at the peak of their housing bubble.Â Statistics Canada today revised the national accounts.Â The result on the household debt front was that instead of Canadian households having a debt to disposable income ratio of 154, it has now been revised upwards to 166.
The new data allows better disaggregation of non-profits and households that were previously lumped together.Â The lower debt ratios of non-profits were making the entire sector look like it had less debt.Â Now that households can be pulled out and examined specifically, the amount of debt they are carrying turns out to be much higher than previously thought.
Figure 1: Pre-Revision Debt to personal disposable income
Source: Bank of Canada (pg. 4)
With the new higher personal debt ratio of 166%, Canadian households are now more indebted than Americans were at the peak of their housing bubble in 2007 when their household debt ratio hit 165%.Â The British were also riding high on household debt when they hit their peak debt to disposable income ratio of 160% in 2008.Â For both of these countries the ratio has declined significantly since the peak and appears to be a downward trajectory.
Looking at the revisions themselves and focusing in on the credit market debt to disposable income, not just total debt to disposable income, the revisions start to really alter the data in 2005.Â After 2005, the divergence between the pre and post-revision data widens.Â The first quarter data for 2012 reported household credit market debt to disposable income of 152%, the revised data for the second quarter of 2012 puts the figure at 163%, an 11% point increase.
Figure 2: Pre & Post Revision Credit Market to Disposable income ratio
Source: The Daily
It is increasingly clear from these new figures that Canadians are overleveraged, as of this quarterâ€™s data, more so than the Americans or the British at their housing bubble peak.Â The household debt situation is going from bad to worse in Canada with no clear signs that debt accumulation is slowing.Â Given continued emergency low interest and mortgage rates, the situation, at least in the short term, may well be sustainable.Â However, as indebtedness continues to grow for Canadians, their overleveraging and eventual exposure to higher interest rates becomes more dangerous.
While we may want to blame a variety of factors for getting us here, slashing of CMHC insurance eligibility rules, falling mortgage rates, lax bank lending standards and eager homebuyers, we are here now.Â The question for the future is how we can stop additional debt accumulation while at the same time largely maintaining home equity as the primary asset for retiring baby boomers.