Who’s afraid of a little debt?

Run for your lives! It’s the heavily indebted!

We kid, of course. But such a response would be entirely typical of the media coverage household debt has been receiving in Canada of late. Every week, every day it seems, brings some new alarmist headline or breathless TV news segment bemoaning how much money Canadians are borrowing and how, in due course, this will ruin us all.

Yes, Canadians are borrowing a lot of money. That much is true. But they are doing so in a period of sustained low interest rates. They are doing so during a period of robust strength in the housing market. And most important of all, they are adding household assets faster than they are adding debt.

This is crucial. The metric usually used in the alarmist stories to quan- tify debt levels is amount of debt as a percentage of annual income — how much you owe divided by what you make each year. By the end of 2014, in Canada, that figure was 163.3 per cent. Yes, that’s a record, but it’s not particularly high by international standards — well below the level of many European countries. Still, yes, it would be difficult for the average Canadian to suddenly pay off all of their debt at once. If that’s what worries you, by all means, head for the hills.

But that’s not a particularly useful measure of affordability: it’s how much of your income you have to pay to service the debt each year that really tells the tale. As a report by Statistics Canada’s former chief economic analyst, Philip Cross, noted Wednesday, thanks to the low interest rates that have prevailed since the global economic crisis, Canadians are spending a much smaller proportion of their household disposable income servicing debt now than ever before: just seven per cent, compared to nine per cent in 2009.

The more telling figure, however, is debt vs. household assets. In 2014, StatsCan estimated the total value of all household liabilities at a record $1.8 trillion. Shock. Horror. Or would be, had Canadian households in the same year not held assets — mostly real estate and investments — valued at $10 trillion: five times debt. That put household net worth at over $8 trillion — also a record.

Yes, it’s true that some people borrow too much and get into trouble; some always have, and some always will. It is also true that the more heavily indebted you are, the more vulnerable you are to sudden economic shocks, such as an illness, job loss or broader economic crisis. It is obviously sensible advice to only borrow what you can afford — which is why politically popular policies designed to encourage more borrowing, such as easier mortgage terms for first-time homeowners, should be reined in, and are.

But overall, Canadians have behaved responsibly. Even in this low interest rate environment, households have been taking on debt at a slower pace in recent years. Indeed, with mortgage costs at historic lows relative to income, it’s clear that Canadians could prudently borrow even more than they in fact have.

Have some Canadians borrowed to pay for consumer goods? Undoubtedly. But have many others borrowed to purchase or renovate houses, or to pursue higher education? Yes they have, allowing them to add to their stock of capital, physical or human, and to earn returns on it. We note, in this regard, that the same critics so visibly fretting about household borrowing are often the first to wave away concerns about excessive public debt, on the grounds that it is used to purchase assets paying returns far into the future. We only wish they would extend the same benefit of the doubt to people who borrow on their own account, rather than someone else’s.

Canadians are spending a smaller proportion of their disposable income servicing debt now than ever before