Is household debt Canada’s Achilles heel?

Is Canada’s economic strength running on unsustainably high levels of household debt?

Last Thursday, Bank of Canada Governor Stephen Poloz said the country is now in a “sweet spot” of a nearly fully-engaged economy while inflation was largely under control.

But one of Poloz’s chief concerns remains Canada’s sky-high level of household debt, which Statistics Canada reported earlier Thursday had set yet another record — 171.1 per cent as a proportion of household disposable income in the third quarter. That tops the record of 170.1 per cent that was set in the previous quarter.

The new level means there’s $1.71 in household debt — which includes consumer credit cards, lines of credit, mortgages and non-mortgage loans — for every dollar in Canadians’ disposable income.

Last month, the Organization for Economic Cooperation and Development pegged Canada’s total household debt (at a record $2.11 trillion) at 101 per cent of GDP, the highest such level among major economies in the world.

Poloz and many bank analysts expect new mortgage rules for uninsured mortgages that come into effect Jan. 1 to help flatten household debt’s upward climb.

The new stress tests, unveiled in October by the Office of the Superintendent of Financial Institutions, will require homebuyers with uninsured loans to show they could withstand higher interest rates, the greater of either two points higher than their contracted mortgage or the five-year benchmark rate set by the Bank of Canada.

Indeed, many experts say the latest increase in household debt was partly fuelled by people rushing to purchase houses before the end of the year.

But some observers warn such changes — stress tests for homebuyers with insured loans were added in 2016 — are driving more people to seek loans from non-bank sources, such as credit unions, where those restrictions don’t apply.

High household debt levels represent financial vulnerability should interest rates climb or housing prices. Given continued slack in the labour force, Poloz is loath to move interest rates higher too quickly, though the Bank of Canada has signalled rates will continue rising.

The rub, of course, is that today’s low rates encourage borrowing.

(This editorial was published Dec. 15 in the Halifax Chronicle-Herald and distributed by The Canadian Press.)