Canada’s household debt may not be so alarming
It’s a ‘relatively conservative’ figure compared to some countries, report says
Everyone from the International Monetary Fund to the Bank of Canada has sounded alarm bells on the high level of household debt in Canada, but a new report suggests the situation isn’t all that dire.
Due largely to the dramatic rise in home prices in some of Canada’s largest cities, credit market debt continues to be considered a major threat to the financial system. Recent figures from Statistics Canada that show Canadians have $1.68 in credit market debt for every $1.00 of disposable income — a record high — are indeed worrisome.
However, data from National Bank Financial economists Stéfane Marion and Matthieu Arseneau, shows household debt is not as big a problem as many fear.
“After controlling for fundamentals such as employment, population growth, housing tenure, immigration, education and the solidity of the welfare system, our analysis suggests that the ratio of household debt to disposable income in Canada is relatively conservative,” the economists said. “This probably reflects the cumulative effect of all actions taken to date to mitigate the vulnerability of the financial system to household indebtedness.”
NBF compared household debt as a percentage of net disposable income for major Organization for Economic Co-operation and Development countries. While this measure of indebtedness has never been as high in Canada, the country ranks eighth at about 170 per cent, just behind Ireland and Sweden. Meanwhile, Switzerland, Australia, and Norway were much higher above 200 per cent, and the Netherlands and Denmark exceeded 250 per cent.
Highlighting several of the risks Canada faces, David Watt, chief economist at HSBC Bank Canada, pointed to trade policy uncertainty, a heavy reliance on foreign portfolio flows, and of course, the level of household debt.
He forecasts GDP growth of 3.0 per cent for 2017, followed by just 1.9 per cent in 2018 and 1.6 per cent in 2019. “A key reason for the slowdown in growth in the next two years that we forecast is our expectation that the contribution of consumer spending will decline,” Watt said in a recent report. “The overly indebted household sector and overvalued housing markets have been persistent risks to the economic outlook, and we see these issues remaining key domestically-oriented risks in 2018.”
In support of their more optimistic outlook, the NBF economists also noted that the household sector in Canada includes noncorporate businesses. When U.S. figures are adjusted to reflect this element, that country’s debt-to-disposable income ration climbs to 141 per cent from 104 per cent — making the situation in Canada look far less dire in comparison.
With more than 80 per cent of Canadian household debt in mortgages and home equity credit lines, higher interest rates will certainty put additional pressure on those who own or are looking to buy property that has spiked in value in recent years.
“Even after this rise, the price of a comparably sized downtown apartment in Vancouver and Toronto does not seem extreme by international standards,” NBF said.
Home prices in Vancouver and Toronto, for example, are far behind many cities across the globe. The economists noted that Hong Kong topped the list, with the average price per square feet of a downtown apartment coming in at US$3,257. London, New York, Beijing and Paris were all far behind in the US$1,000 to US$2,000 range along with four other cities, while Vancouver came in at just US$815 as of summer 2017. Toronto was even lower at US$601.
NBF highlighted several other factors working in Canada’s favour, including the country’s secondplace rank among OECD nations for share of the working-age population with jobs.
They also noted that employment growth in Canada is primarily due to full-time employment — a key element behind household borrowing capacity.
Demographics go a long way in explaining why 40 per cent of Canadian households have mortgages. The prime-age workforce (25 to 45 years old) — the group most likely to buy a home with leverage — is benefiting from full employment.
As for immigration, approximately 300,000 new permanent residents come to Canada every year, and that number is expected to rise by 13 per cent in 2020. More important, more than 60 per cent of these immigrants are selected because of their ability to become “economically established.” That compares to just 13 per cent in the U.S. and four per cent in Germany.
“These are the immigrants most likely to find jobs, form households and, ultimately, buy homes,” NBF economists said, noting that more than 60 per cent of Canada’s foreign-born population has postsecondary education, the largest proportion in the OECD.
“There is an association between household debt and education (higher and less uncertain income stream over life cycle),” they added. “And the more educated a population, the more likely its workers are to remain productively employed as they move through their prime years in the labour force.”