An aging population may mean lower household debt

Canadians seem to have taken to heart warnings from Finance Minister Jim Flaherty and Bank of Canada governor Mark Carney, among others, about high levels of household debt.

A poll commissioned by CIBC released this week revealed that nearly half of the 72 per cent of Canadians who carry some form of debt have made a lump- sum payment in the last year.

And, although few seek out professional advice on debt management, most are making the right choice to pay down the highest- cost debt first. Almost two- thirds directed payments to credit card debt, followed by lines of credit ( 42 per cent) and mortgages ( 22 per cent).

This is not to suggest that overall debt is declining, but rather it is rising at a slower rate. Mortgage debt as of March 2012 was up 6.3 per cent yearoveryear, compared with an average 7.3 per cent over the last two years. Consumer debt is rising more slowly than in the United States for the first time in a decade.

The good news we can take away from the CIBC report is that Canadians have recognized the dangers of too much debt before a crisis unfolds and will likely avoid the painful adjustments Americans have had to make. With the rate at which debt is accumulated slowing down, there is less pressure on the Bank of Canada to raise interest rates in an effort to cool the market — it’s cooling on its own.

However, there are still clouds on the horizon. The widely watched ratio of household debt to disposable income declined in the fourth quarter of 2011 but Canadians still owed $ 1.50 for every dollar earned, down from $ 1.52 in the third quarter. To put this in historical perspective, the latest ratio compares to 66 cents for every dollar in 1980. Moreover, the improvement

in the ratio over the third and fourth quarters had more to do with increases in personal income and inflated asset values than debt reduction, which underscores the risks to household balance sheets from rising interest rates or falling asset prices

From an economic viewpoint, debtfuelled spending is beneficial in that it spurs growth of gross domestic product, while debt repayment does not directly contribute to GDP. Nevertheless, paying down debt frees up borrowing capacity, which augurs well for future growth.

One of the comforting numbers in the debt story is that the percentage of loans for which payments are 90 days or more past due is a scant 0.4 per cent. Another is that the subprime mortgage market accounts for less than three per cent of outstanding mortgages in Canada, compared with roughly 14 per cent in the United States in advance of the financial crisis.

And one more: As data from the 2011 census has shown, Canada’s population is rapidly aging. While the proportion of total debt held by older households has grown, they tend to have lower debt than younger households and a moderating effect on total household credit. Indeed, individuals under the age of 45 represented 45 per cent of the population but 54 per cent of borrowers and held 61 per cent of all household debt, according to a recent Statistics Canada study.

Canadians over the age of 65 have the least debt, an average of $ 66,000, compared with $ 129,200 for those under 45 and $ 102,800 for those 45 to 64.

It’s true that older Canadians are more indebted than in the past, but it appears that time is on our side in coming to grips with Canada’s household debt burden.