Canada and the World
Current Events with a Canadian Perspective
Last update
16 December 2010
Rising Household Debt
The mountains of private debt that have been
built up over the past couple of decades
threaten the stability of the economy
It’s widely accepted that the low cost of borrowing has encouraged too many people to run up more debt than they can safely carry.
In a speech to The Economic Club of Canada (December 13, 2010) Mark Carney, the Governor of the Bank of Canada had some stark warnings:
- “In a world awash with debt, repairing the balance sheets of banks, households and countries will take years...”
- Canadian household credit has expanded rapidly during the recession and throughout the recovery. As a consequence, the proportion of households with stretched financial positions has grown significantly...
- Canadian households are increasingly vulnerable to an adverse shock and that this vulnerability is rising more quickly than had been previously anticipated.”
Mark Carney is not alone in his concerns.
“Homeowners are borrowing against their houses’ rising value to fuel discretionary
spending. Banks are peddling risky loans to people with poor credit histories. As
the economy slows, mortgage delinquencies and credit-
That sounds as if it was written yesterday, but it wasn’t. The quote is from a 2001 article in Newsweek.
In the article, Daniel McGinn went on to report: “The phrase debt crisis used to refer to Mexico’s or Argentina’s defaulting on bonds. In the months ahead, some economists warn, a growing number of families may experience one firsthand. Of course, the disaster scenarios may be premature.”
Buoyant Economy Drives Credit
Daniel McGinn was a little early with his prediction of trouble ahead. Apart for the setback after the 9/11 terrorist attacks, the economy hummed along nicely for many in the years leading up to the 2008 global meltdown.
In a 2009 report on Canadian debt, the Certified General Accountants Association
of Canada (CGA) says Canadians enjoyed “a 17-
Credit cards were easy to come by and consumers leveraged their home equity for cash.
Debt Mountain Keeps Growing
The CGA report, says Canadian household debt continued to grow even after the economy started to crumble.
Looking at debt up to the end of 2008, the study found that 42 percent of Canadians said their debt increased in 2008, more so for households with incomes under $35,000, those with children, and retirees.
For many the percentage of debt to income, assets, and net worth all increased. And,
the proportion of those who felt they have too much debt and have trouble managing
it was up as well. Furthermore, about 58 percent of respondents said that day-
Economic Downturn Starting to have Impact
Making matters worse, consumers also reported a drop in the value of their investments, and many had lower or static incomes.
In addition to the worsening financial situation of individual consumers, the CGA report says, “Softer labour markets, declining business activity, further downgrading of asset values, and rising public debt will make it much more difficult for other sectors to absorb the negative developments in the household sector if its decline continues to deepen.”
Not surprisingly, declining incomes and assets have left a lot of Canadians feeling
somewhat gloomy about the future. Forty-
Bank of Canada Alarmed
about Rising Household Debt
In June 2009, the Bank of Canada reported growing concern over rising household debt.
The Bank said the level of debt to income has reached a record high, making it the
greatest risk to Canada’s financial system.
Its bi-
Although Canada’s financial system is in better shape than some countries, mounting debt spells danger.
In 2009, Canadians’ household debt was about 140 percent of disposable income, compared with about 150 percent in Britain and almost 170 percent in the United States. The level is about 90 percent among the countries that use the euro. At some point it all needs to be paid off.
Sources
“Maxed Out.” Daniel McGinn, Newsweek, August 27, 2001.
“Where Has the Money Gone?” Certified General Accountants Association of Canada, 2009.
“Where Is the Money Now?” Certified General Accountants Association of Canada, 2010.
“Financial System Review.” Bank of Canada, June 2009.
“Debt Alert.” Jeremy Torobin et al, Globe and Mail, December 14, 2010.
© Canada and the World, December 2010
All rights reserved
PILING ON
Amount of credit card debt held owed by Canadians in December 2004: $36.7 billion
in December 2006: $39.9 billion
in December 2008: $53.4 billion
in October 2010: $57.3 billion
Source: Bank of Canada
“Regrettably, we are
compelled to report
that the financial
state of the Canadian
household has continued
to deteriorate.”
Certified General Accountants Association of Canada 2010 report
According to a Statistics Canada report in December 2010, for every one dollar in
disposable income each Canadian household has $1.48 in debt; that’s the highest debt-