Another day, another record level of household debt in Canada. It was reported yesterday that the ratio of Canadian household debt to disposable income reached a new record of 1.673 (i.e. $1.673 in debt per $1 of income) in the final quarter of 2016. It was only a couple of years ago that this ratio topped the 1.63 peak seen in the US just before the financial crisis, and it's only been onwards and upwards since then.
An economist at my old shop, Toronto Dominion, Diana Petramala, tries to find comfort where she may: "Debt growth has accelerated somewhat, but it is not growing at the double digit pace that would normally be considered dangerous". I'm not sure where that rule comes from, and I would suggest to Ms Petramala that if a ratio reaches an all-time record high at a time when interest rates are at a record low, that might be danger enough to be going along with.
The other thing that is regularly trotted out as a reason not to worry about the level of debt is the seeming rise in household net worth. Sure enough, that's being cited again now, but it's still a dangerous fallacy. Your home is a very illiquid asset, especially in the event of a downturn in the market. High house prices have only been possible because of rising debt; when the music stops, a large number of people are going to find themselves unable to find the financing to keep up their debt payments.
Canada may, in fact, be close to a situation in which the household debt burden is unmanageable whether the economy expands or falters. If growth continues at the pace seen in recent months, the Bank of Canada will be forced to follow the Fed in raising rates, which would immediately push some of the most highly indebted households over the brink. And if growth stalls and people start losing their jobs, widespread mortgage defaults would be inevitable. Stress tests supposedly show that bank balance sheets could easily withstand a significant housing market correction. Let's hope so.
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