Con­cerns over house­hold debt are overblown

Most Cana­dian house­hold debt is in hous­ing, which ap­pre­ci­ates in value over time

The Hamilton Spectator - - COMMENT - LIVIO DI MATTEO Livio Di Matteo is se­nior fel­low at the Fraser In­sti­tute and au­thor of the study House­hold Debt and Govern­ment Debt in Canada, avail­able at www.fraserin­sti­ Dis­trib­uted by Troy Me­dia

Cana­dian house­hold as­sets rose from $2.2 tril­lion in 1990 to $12.3 tril­lion in 2016.

With head­lines about Cana­dian house­hold debt hit­ting record lev­els and dire warn­ings from top pol­icy-mak­ers such as Bank of Canada gov­er­nor Stephen Poloz, Cana­di­ans may think house­hold debt is out of con­trol.

The con­cerns, how­ever, of­ten fail to prop­erly ac­count for the other side of the bal­ance sheet.

Yes, Cana­dian house­holds have taken on more debt. But they’ve used this debt to fi­nance as­sets — real es­tate and re­tire­ment sav­ings, for ex­am­ple — that grow over time, caus­ing their net worth to swell, also to un­prece­dented lev­els.

By the end of last year, house­hold debt eclipsed $2 tril­lion, up from $357 bil­lion in 1990. Two-thirds of this debt is for mort­gages; the re­main­ing third is split be­tween con­sumer credit (29 per cent) and other loans (five per cent).

De­spite the pre­oc­cu­pa­tion with over­heated real es­tate mar­kets, the mort­gage share of to­tal house­hold debt has re­mained sta­ble. The $2-tril­lion-plus in house­hold debt now equals ap­prox­i­mately 170 per cent of house­hold dis­pos­able in­come com­pared to just 90 per cent in 1990.

So does this mean Cana­di­ans are be­ing ir­re­spon­si­ble with debt? No. The growth in house­hold debt has partly been a ra­tio­nal re­sponse to plum­met­ing in­ter­est rates. The Bank of Canada rate has fallen dra­mat­i­cally from nearly 13 per cent in 1990 to 0.75 per cent at the end of last year. Not sur­pris­ingly, as the cost of bor­row­ing has dropped, Cana­dian house­holds have bor­rowed more.

The drop in in­ter­est rates has been so sig­nif­i­cant that the in­ter­est bur­den of ser­vic­ing debt has de­clined as a share of in­come, de­spite grow­ing house­hold debt. To­day, in­ter­est pay­ments on house­hold debt con­sume six per cent of dis­pos­able in­come com­pared to al­most 11 per cent in 1990.

That brings us back to the other side of the bal­ance sheet — house­hold as­sets. While house­hold debt has grown sub­stan­tially over the past 26 years, house­holds are bor­row­ing to in­vest in ap­pre­ci­at­ing as­sets such as real es­tate, pen­sions, fi­nan­cial in­vest­ments and busi­nesses. Cana­dian house­hold as­sets rose from $2.2 tril­lion in 1990 to $12.3 tril­lion in 2016.

The sig­nif­i­cant in­vest­ment in as­sets has meant that house­hold net worth (to­tal as­sets mi­nus li­a­bil­i­ties) surged from $1.8 tril­lion to $10.3 tril­lion, a record level, dur­ing the same 26-year pe­riod. As a share of gross do­mes­tic prod­uct, house­hold net worth rose from 265 per cent to 498 per cent.

While govern­ment pol­icy-mak­ers fret over house­hold debt, the irony is that un­like govern­ment, house­hold net worth is pos­i­tive and in­creas­ing over time.

Debt is a tool and the con­cern should only be about debt that’s not man­age­able given the eco­nomic cir­cum­stances of a given house­hold. The great­est risks to man­age­ment of house­hold debt are:

•eco­nomic shocks that lead to job losses, which make it harder for peo­ple to ser­vice their debt;

•in­creases in in­ter­est rates that raise debt­ser­vic­ing costs.

Even with any small fore­cast in­creases, in­ter­est rates re­main low and the Cana­dian econ­omy has per­formed ad­e­quately in terms of em­ploy­ment, with rel­a­tively low job­less rates.

While these macroe­co­nomic fac­tors are of con­cern, they should also be kept in con­text. De­spite record high lev­els of house­hold debt, there are also record high lev­els of net worth.

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