The rise in Canadian household debt paints an incomplete and much too grim picture of the state of Canadian household finances, according to a special report published by BMO.
The 2014 Q4 National Balance Sheet Accounts published by Statistics Canada indicated that household debt levels are now 163% of disposable income, meaning that Canadians are borrowing $1.63 for every dollar they make, whereas the savings rate has remained at an average of 4% in the past year. Those figures alone don’t mean that Canadians are spending irresponsibly, however.
The BMO report suggests that net financial assets, defined as all liquid assets a household owns, such as cash, deposits, bonds, stocks, life insurance and pension assets minus all household debt, is a much more accurate indicator of how Canadians are doing financially.
In 2014, net financial assets had reached 330% of disposable income, nearly double the lows from the 2009 recession. The main contributing factor was the rebound in equity markets, which has also seen steady growth in its share of Canadian household asset holdings from 10% in the early 1990s to 38% in 2014.
Benjamin Reitzes, senior economist at BMO, said the improving accessibility of stock trading over the years is probably why Canadians are starting to put more wealth into the equity markets. This also means that Canadian households are more vulnerable to market changes, however.
“It’s something that people should be aware of,” Reitzes said. “The impact that a drop in the equity markets can have on household wealth.”
The increase in debt levels shouldn’t come as a surprise, the report said, in light of the unexpected .25% cut to overnight interest rates earlier this year.
“This is the thanks consumers get for responding predictably to the incentive of record-low interest rates, and effectively backstopping the economy for the past five years.”
According to a February Ipsos-Reid survey, nearly one in five Canadians were willing to take out a home equity line of credit for large expenses after the rate cut, and the same number were willing to take out a non-home equity line of credit.
The same survey also found that 14% of B.C. respondents were technically insolvent, even when factoring home equity as an asset.
Reitzes said that while consumer spending can be expected to drag a little due to reduced borrowing, it shouldn’t be cause for concern.
“It makes further borrowing somewhat privative,” he said. “But It’s not really a negative, just less of a positive.”
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