Photo: James Bombales

Canadians have some of the highest levels of household debt in the world, a fact that the Bank of Canada is constantly weighing when deciding whether or not to hike interest rates. But according to one expert, Canadians seem to be losing their taste for debt.

“The Bank of Canada [has said] that…’Notably household credit growth has decelerated for three consecutive months,’” writes Hilliard MacBeth, in a recent note.

Macbeth writes that, while this deceleration is positive, Canadians aren’t out of the woods yet when it comes to their debt levels.

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“Note that the Bank is saying that the growth in credit has slowed, not that Canadians, en masse, are paying back their loans,” he writes. “Canadians have just slowed the rate at which they are going deeper into debt.”

From 2011 to 2016, private debt grew 7.5 per cent annually, while annual GDP growth was only 2.8 per cent. Its debt-to-GDP ratio sits at 9.6 per cent, placing it in what the Bank of International Settlements recently called a “red zone.”

Much of that debt comes from the housing market. Last week, RBC Global Asset Management chief economist Eric Lascelles wrote that mortgage debt is the one major contributor to Canadians’ debt loads.

“In thinking about the cracks in Canada’s financial system, the housing market and highly indebted households spring immediately to mind,” he wrote. “These vulnerabilities are no secret, and a raft of statistics and graphics can be trotted out to construct the supporting arguments.”

Macbeth has long written that industry watchers aren’t concerned enough with Canada’s level of household debt.

“Most economists ignore the impact of private debt and the financial sector because these are not recognized in their models as having any impact on growth,” he writes. “Unfortunately, that view is incorrect as can be demonstrated by the historical record of asset bubbles and crashes.”

National Bank economist Stefane Marion maintains that, when placed in context, Canada’s level of household debt is not as worrying as it first appears.

In a note last week, Marion wrote that it’s important to consider that private credit in Canada includes Crown corporations, entities that are backed by the creditworthiness of federal or provincial governments. The Bank of Canada also argues that loans between affiliated companies — which are not extended directly by financial institutions — should be excluded.

“These adjustments alone reduce the Canadian credit-to-GDP ratio from 213 per cent to a much less threatening 170 per cent,” he writes.

Also worth considering? Canada’s employment rate, one of the highest in the world.

“Employment surged 2.3 per cent in 2017 in Canada, the largest increase in 15 years,” writes Marion. “The employment-to-population ratio stands at 62 per cent, the second highest in the OECD.”

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