Fraser Forum

Canadian household debt concerns are overblown

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Once again, alarms are sounding about the level of household debt in Canada. A recent Financial Post story highlighted reports by both Equifax Canada and the Swiss-based Bank of International Settlements (BIS) about the growing household debt pile.

Equifax Canada noted that consumer debt in Canada was $1,821 trillion in the fourth quarter of 2017—a new high, up 6 per cent from the year previous. The BIS has published a report singling-out Canada’s early warning signs of a banking crisis given its credit-to-GDP gap and debt service ratio.

Concerns about the responsible use of debt and credit are always warranted, and Canadians should indeed be responsible with their use of credit and debt. In the end, debt is a tool and Canadian households have taken on more debt over time. But this is a rational response to what remain the lowest interest rates in decades. It is somewhat ironic to hear central banks raise concerns about rising consumer debt when rising consumer debt is a function of the low rates they have been only gradually raising to “normal” levels.

Canadians have also used this debt to finance assets—real estate and retirement savings, for example—that grow over time, causing their net worth (their assets minus their debt) to grow. Household net worth at the end of 2016 was $10.368 trillion compared to $10.615 trillion at the end of 2017—an increase of 2.4 per cent. Indeed, the ratio of household net worth-to-GDP has risen over time, but one cannot say the same for government net worth, which as a share of GDP has been at zero or negative for a decade.

The concern should be not with debt per se but debt that’s not manageable given the economic circumstances households face. Even Equifax noted that Canadian consumers were managing to keep on top of their debt situation given consumer bankruptcies were down. The greatest risks to management of household debt are economic shocks that lead to job losses, which make it harder for people to service debt or increases in interest rates that raise the cost of servicing debt.
 
To date, even with recent small increases, interest rates remain low and the Canadian economy has performed adequately in terms of employment, with relatively low unemployment rates. The interest cost of servicing household debt—measured as a share of household disposable income—has fallen over time, down from about 9 per cent in 2008 to just over 6 per cent at present despite the recent increases in interest rates. As for Canada’s unemployment rate, it was 5.8 per cent in February—the lowest rate in a decade.

As a result, household debt remains manageable, though naturally it’s prudent for Canadian households to always be fiscally responsible with their use of credit. In the end, any concerns about household debt should be accompanied by concerns about government debt, given government debt growth shows no sign of abating at the federal level and may be picking-up new life among the provinces.