Worries about Canadian household debt “overblown,” says Fraser Institute

Canadian households are not being irresponsible when it comes to taking on new debt, according to...

Canadian households are not being irresponsible when it comes to taking on new debt, according to a Fraser Institute study released May 20.

According to Statistics Canada, household debt in this country has increased in almost every year since the agency began tracking this information in 1961. This statistic on its own may sound alarming, but when the whole picture is taken into account, the situation isn’t as dire as it may seem.

“Almost every day we hear analysts warning that household debt levels have reached record highs,” said study co-author Philip Cross, former StatsCan chief economic analyst.

“While debt levels are growing, those warnings should be tempered by the fact that asset and net worth levels are increasing at a far greater rate.”

Between 2010 and 2014, household debt grew 21% to $1.8 trillion. At the same time, however, the value of household assets increased to $10 trillion, representing growth of 31% – a full 10 percentage points higher than the increase in debt.

“Despite the lure of record low interest rates, demand for both mortgages and consumer credit has slowed over the last four years to one-third its growth before the 2008-2009 recession, which clearly had a sobering effect on both the appetite households had for more debt and the willingness of lenders to issue new loans,” the report states.

The Fraser Institute argues that debt increases are now being leveraged into gains in household assets, which in turn improves household incomes and net worth.

Much of the concern about debt levels stems from the fact that Canadians are concerned about suffering the same fate as their American counterparts did in the recession and housing bust that began in 2008, the institute said.

Bad debts were behind the recession in the United States, the institute points out, but the problem wasn’t overall debt levels. At issue was the distribution of where the debt originated.

“Too much household debt in the U.S. was issued to households who were obviously a high risk for defaulting,” the report states, pointing to a policy that boosted lending to families of low income and poor credit scores.

“There is no indication that financial institutions in Canada have been anywhere near as lax in their lending standards as U.S. firms were leading up to the 2007 crisis, while capital reserves have always been higher.”

Compared with the U.S., however, Canadians do have a higher debt-to-income ratio than Americans, on average. In this country, household debt levels were at 163% as of the end of 2014, according to Statistics Canada. This means that Canadians are borrowing $1.63 for ever dollar they make. South of the border, this ratio was only 115% in 2012, down from 143% prior to the recession.

When compared with other OECD countries, Canada does fare well in terms of debt-to-income, however. For example, in Denmark and the Netherlands in 2012, the ratio was more than 300%. In Norway, this figure was 210%. These countries are all considered to have sound financial systems.

A BMO Economics study released in March also found that just looking at household debt levels can lead to the wrong conclusion, and also recommends that asset levels be taken into account. This study found that net financial assets in Canada were sitting at 330% of disposable income – more than twice the lows found during the recent recession.

On the other hand, a CIBC Economics report released May 19 pointed out that insolvency rates grew 1.2% in the six months ending in February. This was due in part to overextended credit and unexpected expenses.CIBC found that in B.C. alone, insolvencies didn’t increase at the same rate as it did across the country.