We’ve heard the finger-wagging for years now, but Canadians continue to pile on an unprecedented amount of personal debt in the face of ever-falling borrowing rates and new credit products.
The newest reminder comes courtesy of the Parliamentary Budget Officer, the federal office that serves as watchdog of sorts for government spending. Part of the PBO’s mandate is to provide independent analysis of Parliament’s finances but also on “the state of nation’s finances.”
On that last bit, the office said Tuesday Canadians should brace themselves: household will be more “vulnerable” than ever to shocks to the economy over the “medium term,” or three to five years.
“Based on PBO’s projection, the financial vulnerability of the average household would rise to levels beyond historical experience,” the PBO said.
The PBO expects interest rates to “normalize” over the next five years – which is to say, rise – which will force households to pay more than we ever have toward working off our record debt loads (as a percentage of our incomes). The report makes some prediction on rates below.
The reasons for debt surge are well known by now: a boatload of debt has flowed into a booming housing market as borrowing conditions have eased. Car loans and other debt products have also risen strongly ahead of income growth.
The PBO report said Canadian household indebtedness is now the highest in the G7 group of advanced economies. Here’s four charts that map out the boom:
Consumer credit and mortgages have surged over the past decade, and are largely responsible for the $1.9 trillion sitting on Canadian household balance sheets. Growth in those products — notably personal lines of credit — has made Canadians the most indebted among all G7 nations.
The credit boom has occurred as interest rates have fallen steadily, with Canadian borrowing rates at or near all-time lows. The falling-rate environment has helped Canadians keep current on bigger and bigger amounts of debt, but as the process reverses — when rates start ticking higher — those elevated debts will eat up more as a portion of household income to service.
So what will interest rates look like in five years? The PBO report makes a couple of predictions.
On mortgages, the effective interest rate is projected to rise from 3.2 per cent now to 5.3 per cent by 2020. The effective rate on non-mortgage debt — lines of credit and other products — is projected to rise from 5.3 per cent to 8.1 per cent over the same period.