Canadian households getting poorer, taking on more debt
OTTAWA - Canadians keep taking on more debt even as they get poorer, a new Statistics Canada report shows.
Average household debt in Canada hit a new record high of almost 153 per cent to disposable income in the third quarter, a sizable jump from 150.7 per cent the previous quarter, the agency reported Tuesday.
As well, household net worth declined by 2.1 per cent to $180,100 from $184,700, the sharpest drop in almost three years as the value of pensions and stock investments declined.
The report came a day after Bank of Canada governor Mark Carney again warned about the dangers of household debt poses to the economy going forward.
Canadians are more indebted now than the Americans and British, Carney noted, saying that they need to move to bring debt accumulation in line with income growth, which is modest. Debt rose at about twice the pace of income during the quarter.
But analysts cautioned against taking too dark a view over the health of household finances in Canada.
"It's not black and white," said Benjamin Tal, a senior economist with CIBC World Markets. Most debt accumulation is from mortgages, and unlike the U.S. before the sub-prime fiasco, the segment of home buyers considered "marginal" in Canada is very small.
"I have no problem with people borrowing if they have the ability to pay and have a good job... and can finance this debt when (interest) rates rise."
Other than mortgage debt, most other forms of credit, such as outstanding balances on credit cards, lines of credit and term loans are slowing down or even falling, Tal added.
Bank of Montreal economist Douglas Porter said he believes most Canadians are acting in a rational manner. The Bank of Canada has driven interest rates to near-record lows precisely so businesses and consumers can borrow and spend to support the economy, he said.
"I don't want to say there are no concerns, but is anyone really surprised Canadians are borrowing heavily?" he asked. "The inducement is staring them in the face, people are just responding to the economic incentive in front of them."
The major concern is that debt is growing at a faster pace than incomes, but Porter said there is no hard and fast rule about what level of debt is unsustainable.
The latest data shows debt has been on a rising slope for more than a year, climbing from $1.480 trillion in the second quarter of 2010 to $1.595 trillion today.
Meanwhile household net worth per capita has declined two straight quarters and at $180,100, is now only slightly above last year's level at this time. If inflation is taken into account, net worth actually fell in the past 12 months.
Most of the reason for the sharp setback in the past quarter can be traced to the stock market plunge since late July, which has not only reduced the worth of Canadian's equities investments, but devalued their pension holdings, Statistics Canada said.
"This marked the sharpest quarterly reduction in stock prices and per capita household net worth since the fourth quarter of 2008," the agency said.
Tal said Canadians do have the benefit of time to get their finances in order. Interest rates are expect to remain at extremely low levels for as much as two years, which means debt servicing payments will not appreciably increase during that time.
"If we talk 12 months from now and you tell me debt is up by 10 to 15 per cent and mortgage activity is up 10-15 per cent and house prices are up 10-15 per cent, then I would be concerned," he said.
One of the few pieces of good news in the report was that national worth, which includes firms, increased by one per cent to $6.5 trillion.