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Canadians are doing a bad job in the debt department

And the issue is our housing market

Latest debt data

I’ve been harping on a lot about Canadian debt levels on VICE Money since it launched, but that’s only because it’s really, truly a problem worth paying attention to. The latest numbers from Statistics Canada reiterate my point—household debt-to-income ratios in Canada rose to a record high 166.9 percent in the third quarter of 2016.

In plain English, that means that for every dollar an average Canadian earns, he or she owes $1.67. The other way of calculating this ratio is to add up all your personal debt (mortgages, loans, credit cards & lines of credit) and find out exactly what percentage that is of your annual after-tax income. There are actually online calculators that can help you do that. For the sake of comparison by the way, in 2008, when the financial crisis had just started to bleed north of the border, household debt-to-income ratios were around 145 percent.

Anyway, on average, Canadians clearly borrow more than they can afford, which begs the question, why? In analysing this latest Stats Can data, BMO economist Benjamin Reitzes points out that one of the biggest drivers of household debt has been the very, very hot housing market in Toronto and its surrounding regions. In fact, Reitzes expects housing in the GTA to remain strong, which will likely push debt loads higher.

Canada’s mortgage story

Mortgages are a big chunk of consumer debt in this country. Bank of Canada data from October 2016 pegs residential mortgage credit in our country at $1.4 trillion, about 70 percent of total Canadian household debt.

Because interest rates have been so low since the onslaught of the 2008 financial crisis, borrowing large sums of money for big purchases like a home, has become much, much cheaper than it used to be. We rail on about our parents’ generation having the time of their life in terms of their ability to purchase property, but don’t forget, in the early 1990s, interest rates were as high as 14 percent, as opposed to the present rate we’re borrowing at—0.5 percent! All this to say, cheaper borrowing equates to more people taking on mortgages, and higher debt levels.

So then why is a high household debt-to-income ratio such a big deal? Only because we’re borrowing at a rate that is unprecedented, AND in an economy where our incomes have not risen as much as we’d like them to (they’re inching up at about 2.5 percent per year, on average, slightly above inflation levels, which is frankly, rubbish).

There’s a flipside to this argument, though. Data in the Stats Can report says household asset ratios, improved in the third quarter of this year. Household net worth, according to the report, jumped to a record 843 percent of disposable income, fuelled largely by rising home prices. That basically means if you own a house, the value of your home is approximately eight times your income. It’s tempting to feel rich as a homeowner in Toronto or Vancouver, but remember, you’ll really only reap the reward of this asset gain once you sell your home and pay off all your debt.

I sound pessimistic, but it’s not just me. Our federal government, clearly concerned about the soaring housing markets of Toronto and Vancouver, and the ever-increasing debt loads of Canadians (encouraged in a grand way by the big banks, whose whole raison d’etre is to encourage people to borrow) recently implemented some pretty strict requirements for Canadians looking to take out a mortgage.

And because mortgages are such a huge component of overall consumer debt, it is indeed likely that our debt levels will start to flatten out slightly in 2017, as we see the effect of these new housing rules on borrowing rates.

Vanmala Subramaniam is VICE Canada’s Money & Economics Editor. Follow her on Twitter.

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