Thursday, September 13, 2012

Is household debt a threat to our economy?

Here are the facts:

  1. Canadian household debt is indeed equal to 154% of disposable income
  2.  The housing market is softening and prices are going down in many areas of the country
  3. Canadians will be impacted by higher interest rates
Even given these facts; it’s unlikely that Canada will experience a financial crisis.

Household debt has been increasing steadily over that past 30 years as interest rates continue to decline but, for the most part, Canadians gear their borrowing to what they can afford.  Jobs are holding steady and business is confident about future prospects. So, lower interest rates mean less money goes to servicing debts.

In accumulating debt, Canadians also have a large asset, namely their homes. And although some in the financial community are concerned about the massive debt, Eric Lascelles, chief economist at RBC Global Asset Management recently said that assets outweigh debt by a factor of five.

It’s true that high household debt does put homeowners at risk but a closer look at the stats tells a better story. Overall Canadians exercise fairly good judgment when it comes to borrowing. The more vulnerable – seniors and low-income earners -- carry lower debt loads. It’s also true that the housing market carries a big part of household debt,  however the percentage of income earmarked for mortgage payments is not burdensome.

The new mortgage rules will certainly have an impact on the housing industry as will declining house prices; and interest rates will rise. Perhaps this will lead to some weakening of the economy. Delinquencies might increase a bit but the risk of the economy going into a recession is low. High-ratio mortgages are insured and our sub-prime market is small.

As for the weaker growth, Flaherty has said that the government could increase its deficit to shore up the economy. “If we ran into a serious world economic crisis arising out of the European situation, or something else, “he said, “Then of course we’d be responsive if we had to be to protect the Canadian economy and protect Canadian jobs as we have done in the past.”