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Canada’s GDP growth is expected to rank highest among G7 nations in 2017 by a significant margin, but one economic research firm has sounded the alarm over the country’s elevated household debt level, which also sits well above any other G7 member state.
In a report published today, Capital Economics calls Canadian household debt “outlandish when compared to the rest of the G7.” The report’s author, Senior Canada Economist David Madani, raises several red flags before concluding that Canada could be headed for a financial crisis “of its own making.”
Madani, a notorious Canadian housing market bear whose been predicting a market crash for several years, is a vocal critic of the real estate industry view that high Greater Toronto Area home prices are a result of strong population growth and a housing supply shortage.
But in Friday’s debt-focused report, Madani first highlights the Organization of Economic Cooperation and Development’s (OECD) forecast, published earlier this week, that predicts Canada’s GDP will grow by 3.2 per cent in 2017, well above second-place ranked Germany — set to grow by 2.2 per cent — and third-place United States’ 2.1 per cent growth forecast.
While he acknowledges this growth forecast is welcome, Madani also characterizes Canada’s debt-to-income ratio, currently sitting at 175 per cent, as “staggering.” Canada tops the G7 in this economic measure, with runners-up, the United Kingdom and Japan, recording much lower levels of household debt, at 149.5 per cent and 135.1 per cent, respectively.
“More importantly, Canada’s household debt ratio has risen and surpassed the peak levels observed in the UK and the US around the time of the global financial crisis. This suggests that Canada hasn’t learnt terribly much from these other countries,” Madani writes.
In the report, Madani also takes a shot at the Canada's “bubbly home values,” noting that the value home equity lines of credit at the national level rose by over $13 billion in June 2017 when compared to the same period in 2016. This, he says, indicates homeowners are borrowing heavily against the value of their homes, “creating an added danger that consumer debt could pile up rapidly if households and banks aren’t more careful.”
Not all market observers are convinced that the country’s rising household debt levels are a problem. A report published this summer by the Fraser Institute, a non-partisan think tank, called the concerns “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,” wrote Livio Di Matteo, a senior fellow at the Fraser Institute, in his July 2017 report titled Household Debt and Government Debt in Canada.
The Lakehead University economics professor pointed out that while total Canadian household debt exceeded the $2 trillion mark in 2016, at the same time household assets totalled $12.3 trillion.
“The significant investment in assets has meant that household net worth (which is total assets minus liabilities) has surged,” wrote Di Matteo.
A recent report from the Canada Mortgage and Housing Corporation (CMHC) found that when it comes to mortgages — the largest monthly debt obligation for Canadians — consumers are paying on time and there was a drop in overall delinquency rates in the fourth quarter of 2016.
For his part, Capital Economics’ Madani argues that “debt-fuelled economic growth isn’t a recipe for long-run success.”
“Now with interest rates on the rise and house prices beginning to fall, there is a risk that the large household debt burden might soon turn into a national disaster.”