Rising household debt levels in Canada have triggered worries, but a new report suggests the situation is “overblown.”
“The concerns about household debt fail to account for the other side of the balance sheet — household assets, which rise over the family life-cycle,” writes Livio Di Matteo, a senior fellow at the Fraser Institute, in his report titled Household Debt and Government Debt in Canada.
Di Matteo, also an economics professor at Lakehead University, adds that although household debt soared past the $2 trillion mark in 2016, Canadian household assets totalled $12.3 trillion at the same time.
Real estate can be linked to a large share of that debt — mortgages account for two thirds of the more than $2 trillion worth of Canadian household debt — but it’s also an asset that appreciates. Other appreciating assets on the balance sheet include pensions, businesses and financial investments.
“The significant investment in assets has meant that household net worth (which is total assets minus liabilities) has surged,” Di Matteo says. Last year Canadian household net worth equalled $10.3 trillion, he continues in his report for the Fraser Institute, a Canadian non-partisan think tank.
Low interest rates have encouraged borrowing, and Di Matteo doesn’t deny certain scenarios could mean trouble for Canadians who have taken on too much debt in a low-rate environment.
“There are some risks to the situation, especially about the ability to carry large amounts of debt should the economy experience a downturn as well as the potential for future increases in interest rates,” Di Matteo explains in his report for the Fraser Institute.
Canadians’ ability to repay debt has come to the fore again as the Bank of Canada this month hiked its overnight interest rate for the first time in seven years — and Canadian banks followed swiftly with higher mortgage rates.
Now the overnight rate rests at 0.75 per cent, up from the previous rate of 0.5 per cent. But it still remains historically low: the rate was close to 13 per cent in 1990, according to the report.
And as a result of low rates, as little as 6 per cent of household disposable income was recently going towards debt, versus nearly 11 per cent in 1990.
“The drop in interest rates has reduced the burden of servicing debt despite growing household debt,” Di Matteo points out.
Many observers are calling for another Bank of Canada rate hike before the end of the year, but even amid sharp rate spikes, Di Matteo notes how many households have some insulation from possible negative effects.
“While interest rate spikes can have detrimental impacts on both government and household debt, it remains that the latter often has a substantial cushion of assets to draw down upon,” Di Matteo continues.
The report also notes how the household-debt situation in Canada is far from unique. “Rising household debt is also an international phenomenon,” it reads.
Looking at 27 OECD countries, Canada placed eighth in terms of how much of a share of net disposable income gross household debt accounts for as of 2015.
In Canada, that share was 103 per cent, compared to the high in Denmark of 292 per cent and Hungary’s low of 47 per cent.
Since 1995, growth to Canada’s ratio puts it 14th out of the 27 OECD countries compared on these terms.
That fact, writes Di Matteo, “has been true for every year but one over the last half century.”