Mortgages are the major contributor to climbing Canadian household debt levels, but at least one highly placed market observer sees that as a positive factor linked to borrowers’ healthy net worth and significant gains in the value of their assets. In a report released earlier today, Philip Cross, the former chief economic analyst with Statistics Canada, argues that concern over Canada’s now unprecedented 163 per cent household debt-to-income ratio is exaggerated.
Mortgages accounted for $1.2 trillion or two-thirds of Canadians’ collective household debt of $1.8 trillion at yearend 2014. On the flipside, however, Canadians hold approximately $10 trillion in assets, primarily in real estate and equities.
Cross also points to the slowing rate of debt accumulation, which has dropped about 66 per cent from the pace prior to the 2008 financial crisis, and apparent highly manageable debt service levels. He suggests the record-low ratio of household income allocated to debt service — currently less than 7 per cent nationally — is a more appropriate gauge of economic stability than the debt-to-income ratio.
“That consumer credit is growing more slowly than mortgages reduces the risk profile of households in debt since the collateral of a home reduces the cost of debt,” he reasoned in the report authored for the Fraser Institute. “As well, mortgage debt locks in low interest rates for longer periods, insulating the exposure of households to possible future interest rate hikes.”
Cross tallies numerous differences in lending rules and borrowers’ solvency to dismiss attempts to compare Canada’s current household debt scenario with that of the United States prior to the catastrophic collapse of the sub-prime mortgage regime. He attributes the U.S. meltdown to flawed and indiscriminate lending practices rather than overall debt levels. In contrast, high-risk borrowers in Canada are typically blocked from taking on unsustainable mortgages and Canadian financial institutions are more highly capitalized than the failed U.S. lenders.
Meanwhile, reputable member nations of the Organisation for Economic Cooperation and Development (OECD) have racked up much higher levels of household debt, with 2012 debt-to-income ratios reported to be in excess of 300 per cent in both Denmark and the Netherlands. Norway, the United Kingdom, Australia and South Korea also have ratios higher than Canada’s.
The recently released 2015 federal budget confirmed the Canadian government is working on a national strategy to improve all consumers’ financial literacy. However, Cross contends that much of the populace is generally more sophisticated about debt than in past generations.
“Households most often use debt in three common ways to create wealth in our society: obtaining a post-secondary degree, starting a business, and buying a home,” he writes. “The use of debt to acquire or create wealth is why, even with rising debt liabilities, the net worth of Canadian households continues to soar as the value of their financial and non-financial assets has risen several times faster than nominal debt.”
