Title: The new debt kings
Sub-title: Canadian household debt ratios have now surpassed US levels. Is that a problem?
We Canadians like to think of ourselves as a financially prudent bunch, and though few say so out loud, have a habit of smugly looking down on our irresponsible spendthrift American cousins.
However recent data indicate that things may be changing. Earlier this month, the National Balance Sheet Accounts showed that Canadian household debt is now 148 percent of disposable income, rising above the US ratio, for the first time since the late 1990s.
This raises the question as to whether Canada, which has so far managed to skirt the massive residential real estate crash, financial system collapse and job losses that the United States went through, is now poised to go down the same road.
How much debt is too much?
As Avery Shenfeld, Benjamin Tal and Emanuella Enenajor, economists at CIBC Worldmarkets noted in a recent report sent to the banks clients, debt in itself is not a bad thing: “Without (it) businesses wouldn’t be launched and most individuals would not be in a position to buy a home.”
However carrying too much debt is like wearing a straight-jacket. It hampers your choices in almost everything you do.
For example carrying too much debt can subtly affect your career, by obliging you to tow the line in a job you hate, or to work for a boss who treats you badly, or remain at a company whose ethics you uncomfortable with, simply because, debt payments mean that you cannot do without your salary for the few months needed to change jobs.
In marriage, finances, including debt related issues, are said to account for as much as three quarters of all disputes, and these disputes are an exceptionally good predictor of divorces.
This new peak in Canadian household debt comes at a particularly bad time –the precise year that the first of the country’s baby-boomers turned 65. This milestone foreshadows a move by the largest and most irresponsible generation into retirement, a move that will force the rest of the country to fund the pensions and medical care costs of a self-absorbed group that put little aside to pay for either.
In short, it would appear that Canadian society is ill prepared to deal with this mounting tide of debt, particularly if interest rates start to rise.
Don’t worry. Be happy.
That said, there are indications that things here are far more stable than they are down south. “We are not at the precipice of a US-style disaster,” says the CIBC World Markets. “Canadians have not put themselves in a position where they are straining to meet payments.” CIBC argues that what made Americans vulnerable was not how much debt they were carrying, but rather who was carrying much of it – subprime borrowers.
The other good news is that a higher percentage of income growth in Canada has gone to the middle class borrowers, who can use that money to pay back their debts. In the United States, income gains during the years leading up to the credit crisis, were highly skewed to the top 1-5 percentile of earners, a group that was generally far more able to meet its obligations, while the poorer, and more indebted classes, who really needed the extra cash, got little if any.
Furthermore, as Douglas Porter, deputy chief economist at BMO Capital Markets points out, while Canadian debt levels have risen, so too has the value of the assets they hold, such as their homes and stock market investments. In addition, Canadians are also saving more – 4 percent of their income over the past year, just about double the 2005 levels.
But sleep with one eye open…
Yet according to Bank of Canada governor Mark Carney, it would be foolhardy to get too complacent. “Households need to be prudent in their borrowing, recognizing that over the life of their mortgage, interest rates will be much higher.
Porter notes that the Canadian government seems to agree, citing reports that Ottawa is consulting with the big banks about implementing new measures to curb debt increases.
We’d better hope they do. Because, for many, looking down on Americans has become a national pastime – it would be a pity if we had to find something else to do.
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