Yawn! Household debt hits another new record

Statistics Canada reported this morning that the household debt to income ratio in Canada jumped more than one percentage point in the second quarter of the year, reaching a new all-time high of 167.8 percent.  At the same time, household net worth (which primarily means the equity value in family homes) fell slightly. Separately, survey data suggest that reliance on home equity lines of credit continues to increase and that seniors are. remarkably enough, now going into debt at a faster rate than younger Canadians. Is there any way that this debt spree ends well?

Logically, we should be at a pivot point now.  Consider these factors:

• House prices have been falling in the key Toronto market since April, when the Ontario Provincial Government announced a package of measures to calm the market.  Falling house prices should mean that those Canadians still looking to enter the housing market will need to take on less debt in order to do so.

• The collapse of housing prices should have alerted people to the fact that a stable level of household net worth (i.e. the equity in the family home) is scant consolation when debt is too high.  Over the past four months or so, millions of people have seen the value of their home fall sharply, and the marketability of that home dwindle, while their debt burden has remained unchanged. Now that StatsCan is reporting a small decline in household net worth for Q2,  this truth should be doubly apparent.

• The modest rate increases delivered by the Bank of Canada since June, and the evident risk that more will soon follow, have triggered a tsunami of advice from financial advisors, urging Canadians to ensure that their debt burden remains manageable.  

None of these three factors has been in place for very long, and they can have had little if any impact on the Q2 data released this morning.  The current quarter is a different matter: if, in the face of these cautionary signals, it emerges that households have continued to amass further debt, there will be only two possible conclusions,  neither of them palatable.  Either Canadians are too reckless to rein in their debts when they clearly should, or they are simply unable to do so.  If debt continues to increase, the Bank of Canada will have to think long and hard about how far and how fast it can tighten monetary policy.