There is little evidence that Canadian households are being irresponsible in taking on new debt, finds a Fraser Institute study.
“Almost every day we hear analysts warning that household debt levels have reached record highs. While debt levels are growing, those warnings should be tempered by the fact that asset and net worth levels are increasing at a far greater rate,” says Philip Cross, former chief economic analyst for Statistics Canada and co-author of A Longer-Term Perspective on Canada’s Household Debt.
For example, from 2010 to 2014, the value of assets owned by Canadian households jumped 31% to approximately $10 trillion (mostly in the form of equities and real estate) while household debt grew by just 21% to $1.8 trillion (mostly in the form of mortgage debt).
“You have to account for assets when you’re talking about debt levels — otherwise, it’s an incomplete story,” Cross says.
The study points to several other metrics that suggest record household debt levels don’t predict economic doom and gloom.
Specifically, the growth of household debt in Canada has decelerated by one-third since the recession, despite a prolonged period of low interest rates and debt service costs.
As a result, Canada’s debt-to-income levels have leveled off and are now dwarfed by the ratios of other countries considered to have sound financial systems. Norway, Switzerland, Australia and South Korea all had higher debt-to-income ratios than Canada in 2012 (the latest year of comparable data from the OECD).
“Much of the concern about household debt in this country stems from fears that we will repeat the U.S. experience of 2007 where high debt levels contributed to that country’s financial crisis and housing meltdown. But their problems were mainly the result of policies that encouraged high-risk borrowers to take on excessive debt,” Cross says.
“Canada doesn’t have that problem. Our banks have tighter lending standards and Canadians are clearly managing their debt levels responsibly, with no evident strain to their incomes or balance sheets.”