The Bank of Canada calls it the biggest risk hanging over the nation’s economy, but a years-long run up in household debt poses little danger according to a new study.
“Most Canadians are managing their debt levels responsibly, with no evident strain,” Philip Cross, an economist and former chief economic analyst at Statistics Canada, said in a new report on Wednesday.
In the report published by the Fraser Institute, Cross says media have “seized” upon surging real estate prices as well as a sustained rise in debt levels compared to the relatively smaller gains on paycheques to whip up fears of a looming crisis akin to what the United States experienced in the Great Recession.
But the evidence to date doesn’t suggest a possible replay of that here, he says.
Debt perspective
To start, households in other countries are just as indebted but they still have “sound financial systems,” Cross said. Average household debt in places like Norway, Denmark, Switzerland and South Korea has soared above Canada’s debt-to-income ratio of 163 per cent (meaning for every dollar in income earned by the workforce, Canadians collectively owe $1.63).
Debt growth is also slowing in Canada. The annual expansion of household credit currently stands at about 4 per cent, Cross said. That compares to the relatively blistering pace of 12 per cent registered before the 2008 downturn, he said. Since 2011, debt has risen “at almost the same pace as incomes.”
Other experts support Cross’s view. In a May 12 note, Doug Porter, the chief economist at Bank of Montreal, labeled recent coverage of Canadian debt levels as “scare headlines.”
Little debate
There is “little debate” that Canadian household are “vulnerable to a shock”, Porter said. But the bank economist made a few counterpoints to the doom-and-gloom picture painted by the national press. Many of Porter’s points echoed Cross’s observations:
- Few borrowers are in trouble (for now). The number of homeowners who have missed a mortgage payment for three months in a row or more is close to pre-recession lows, and far below numbers seen in the 1990s (when interest rates were far higher), Porter said.
- Debt servicing costs, or how much money is being paid to cover minimum interest on debt, is in line with the average trend between 1990 and 2004.
- Canada is not “some kind of bizarre outlier.” Many other successful OECD economies carry even higher debt levels, Porter said, adding that “Danish and Dutch press are even scarier” than Canadian headline writers.
Risky distribution
Cross’s report went on to say that the U.S. recession that began in 2007 was precipitated by reckless mortgage lending by U.S. lenders who issued home loans to borrowers “who were obviously at a high risk for defaulting.”
“There is no indication that financial institutions in Canada have been anywhere near as lax in their lending standards,” Cross said.
Cross suggested growth in Canadian consumer debt (things like lines of credit, cards, auto loans and student debt) has slowed compared to mortgages, and that shift has reduced the “risk profile of household debt” because mortgage loans are backed by an appreciating asset – a house.
“As well, mortgage debt locks in low interest rates for longer periods, insulting the exposure of households to possible future interest rate hikes.”
Even in the current rate environment, insolvencies have begun to turn up though. A report from CIBC published Tuesday showed bankruptcies edged 1.2 per cent higher in the six months leading up to February, as diving oil prices spurred job losses in Alberta and elsewhere.
It was the first increase in personal bankruptcies since the recession, CIBC said.
WATCH: Dr. Paul Kershaw, founder of Generation Squeeze, talks about which Canadians carry the most debt.
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