Photo: James Bombales
Canadians have some of the highest levels of household debt in the world. How high? According to a new report from the Bank of International Settlements (BIS), the country’s debt-to-GDP ratio is dangerously high and, if left unchecked, could lead to a financial crisis.
Canada’s debt-to-GDP ratio is 9.6, placing it firmly in the “red zone” with only three other countries: Hong Kong, China and Switzerland. For comparison’s sake, the United States ratio sits at -6.9.
What’s more, Canada’ debt-service ratio — an indicator of interest payments and mortgage debt relative to income — sits at 2.9 per cent, above the 1.8 per cent that BIS considers healthy.
According to RBC Global Asset Management chief economist Eric Lascelles, there’s one major contributor to Canadian household debt: housing.
“In thinking about the cracks in Canada’s financial system, the housing market and highly indebted households spring immediately to mind,” he writes in a recent note. “These vulnerabilities are no secret, and a raft of statistics and graphics can be trotted out to construct the supporting arguments.”
Lascelles points to the Bank of Canada’s “Vulnerabilities Barometer” chart, as a sign of the housing market’s increasing instability. The barometer currently sits just above a 5, boosted mainly by the housing market.
“According to the Bank of Canada’s research, their new metric has superior predictive ability relative to other popular measures,” he writes. “Furthermore, they can map the measure onto the likelihood of a period of financial stress occurring over the coming two years. They put this at a sizeable 36 per cent.”
But there is some good news in all of this — despite rising debt levels, Canadians are still making their mortgage payments. According to a report from Equifax Canada released today, the majority of Canadians are still paying down their mortgage debt every month.
“Despite the high debt, mortgage payments are generally on time, which could be attributed to low unemployment numbers and mortgage and auto finance interest rates which are still at historically low and reasonable levels,” writes Equifax Canada senior director of decision insights Regina Malina, in a statement.