Canadians in debt deeper than ever before

Canadians deeper in debt than ever before

Encouraged by low interest rates, household debts have risen, but economists say they are manageable

Madhavi Acharya-Tom Yew

Business Reporter

 

Published On Tue Dec 15 2009

A new report from Statistics Canada carries a sober message: collectively, Canadians are deeper in debt than ever before.

But economists say record-low interest rates mean that debt loads are still manageable and will likely improve as the economy begins to recover from the recession.

The StatsCan report, issued Monday, comes on the heels of a stern warning about rising debt issued last week by the Bank of Canada.

Surging stock markets pushed up Canadians' net worth in the third quarter, StatsCan said.

The S&P/TSX Composite Index rose 9.8 per cent in the third quarter. That's on top of a 19 per cent gain in the previous three months.

Household net worth, the value of families' assets such as cars, homes, savings accounts and investments, minus what they owe, reached $5.72 trillion at the end of September. That's an increase of 2.3 per cent, marking two quarters of gains after three consecutive drops.

But household debt, mainly mortgages and consumer credit, rose from July to September as Canadians rushed to take advantage of low interest rates. Personal sector liabilities rose to $1.41 trillion, up 1.6 per cent.

"Falling mortgage rates, along with increased sales of existing homes and renovations, sustained increases in mortgage demand," StatsCan said. "Strength in auto purchases led to a further increase in consumer credit."

The result is a record debt-to-income ratio of 145 per cent, the agency said. That means for every $100 of income, Canadians owe $145.

The central bank has made a pledge to stand pat on interest rates until June 2010 to preserve the nascent economic recovery that is taking root. Still, the Bank of Canada warned last week that rising debt levels will make Canadian households more vulnerable when interest rates do go up.

"All this time the Bank of Canada was urging banks to lend. Now it's saying slow down a little," said Benjamin Tal, senior economist with CIBC World Markets. "The Bank of Canada is trying to remind people those are emergency interest rates that will rise. It's not a matter of if, but when. The theme is to be prudent."

Despite the increase in borrowing, the household debt-to-net worth ratio is edging downward as the asset gains offset the increase in liabilities, said David Onyett-Jeffries, an economist with the Royal Bank of Canada's RBC Economics. "It's showing that households aren't as over-leveraged, especially compared with U.S. households."

The debt-to-income ratio in the U.S. is 175 per cent.

The net worth figures don't capture the full rise in the housing market, Onyett-Jeffries added. Seasonally adjusted existing unit sales and average prices are up 11.8 per cent and 7.1 per cent, respectively.

Economists also expect to see the debt-to-income ratio improve in the coming year as interest rates rise and the economy recovers.

Household per capita net worth is now $168,800, below the peak of $179,000 in the second quarter of 2008, Statistics Canada said.

Canada's national net worth, which includes business and government assets and liabilities, fell 1.3 per cent to $5.89 trillion as governments and consumers took on more debt, the report said.