Household debt in Canada 'may be unsustainable,' report says
Canada is among seven developed countries with household debt levels “that may be unsustainable,” according to a new report, which follows on the heels of a surprise interest rate cut by the central bank.
A new report from McKinsey & Company says that Canada was second only to Greece for the biggest leap in household-debt-to-income ratio between the years 2007 and 2014.
And Canada is among seven countries that “have household debt that may be unsustainable,” the report says. The others are the Netherlands, South Korea, Sweden, Australia, Malaysia and Thailand.
According to the report, Canada’s household debt-to-income ratio is 155 per cent. Statistics Canada figures from December put that figure at 162.6 per cent. Using the StatsCan figure, it means that Canadians owe nearly $1.63 for every dollar of disposable income they receive.
“The question now is whether high household debt in some countries will spark a crisis,” the report says.
“More than ever, effective tools are needed for issuing, monitoring, and managing household debt.”
A steady increase in mortgage debt is typically reflective of four factors: rising homeownership rates, rising real estate prices, tax incentives that favour debt, and interest rates, the report says.
Between 2000 and 2007, house prices in Canada rose by 89 per cent, the report notes, and interest rates in this country have been at historic lows for years. The Bank of Canada made borrowing even easier last month, when it announced a surprise cut to its trend setting rate to 0.75 per cent.
As expected, some lenders lowered their mortgage rates, but consumers are still waiting to see if there will be a widespread mortgage rate war.
Kevin O’Leary, chairman of O'Leary Financial Group and host of Dragon’s Den on CTV2, said Thursday that household debt has been a problem in Canada “for multiple generations.” But it’s the low interest rates of recent years that have lowered the cost of servicing that debt, “and families have taken advantage of that.”
“The biggest fear is that when interest rates go up, the cost of this debt is going to bankrupt many Canadian families,” O’Leary told CTV News Channel.
The main solution to the problem, O’Leary said, is to teach children from a young age about money and debt. Otherwise, the problem begins when teenagers starting taking on tens of thousands of dollars in student loans.
“We’re asking people that are 16 to 18 years old to take on $100,000 of debt to go to college and university, and to make that decision when they’ve had no training at all,” O’Leary said.
“That’s the beginning of what happens to people in Canada as they pile on debt and it goes right into their thirties and forties. This is a huge problem that’s not going to be solved easily.”
When the Bank of Canada lowered its rate last month, governor Stephen Poloz pegged his decision on plummeting oil prices and a slowdown in the country’s energy sector that could lead to a spike in unemployment.
At the time, he noted an uptick in activity in non-energy export sectors, which are benefitting from a low loonie and strong economic growth in the United States.
He warned that the real impact sustained low oil prices will have on the Canadian economy is not yet known. But he was hopeful that the benefit of keeping rates low to make capital available to individuals and businesses would outweigh the potential risks of making borrowing cheaper, particularly on household debt.