Briefing highlights
- FAQs about consumer, government debt
- Global stock markets mixed
- New York poised for stronger open
$1.67
What we owe for each $1 of disposable income
These should be frequently asked questions about Canadian consumer and government debt, though many of us don’t want to hear the answers all too frequently.
But let’s ask them anyway in light of the latest report on Canadian consumer and government debt.
Q: What do the latest statistics on consumer debt mean?
Nothing good.
As The Globe and Mail’s Rachelle Younglai reports, the key measure of a consumer’s burden, household debt to disposable income, climbed in the third quarter to 166.9 per cent.
As Statistics Canada put it Wednesday, that means we owe about $1.67 for every $1 of our disposable income.
Much of this has to do with rising property values and low borrowing costs. It’s cheap to borrow, so why not go out and buy a house?
Household debt now stands at more than $2-trillion, about $1.3-trillion of that in mortgages. We’re also getting richer, but hold that thought.
“The fact that household net worth rose to a record high of 843.4 per cent of disposable income mitigates some of the concern about rising debt levels,” said David Watt, chief economist at HSBC Bank Canada.
“However, private non-financial debt rose to a record high 220.3 per cent of GDP, around an 18.7-percentage-point gap with its long-run trend,” he added.
Q: Why is this happening?
We’re borrowing at a faster pace than our incomes are rising.
The increase in the third-quarter debt burden wasn’t huge, up from 166.4 per cent in the previous three-month period and, according to BMO Nesbitt Burns, the slowest rise for a third quarter since 2000.
Ah, but ...
“Even with the more modest increase, the upward trend in household debt, which started as far back as we have data (the series starts in 1990), continues unabated,” said BMO senior economist Benjamin Reitzes.
“However, we might start to see the ratio flatten out a bit in 2017 as the Vancouver housing market has cooled notably due to the foreign buyers’ tax, and the new mortgage rule should dampen activity modestly in 2017,” he added.
“Importantly though, housing in Toronto and the surrounding region remains quite strong, which will likely push debt loads higher.”
Q: Are we in trouble?
Some of us could be in the event of an economic shock. The Bank of Canada has already issued warnings about the number of vulnerable families, and is likely to do it again today when it releases its review of the financial system.
The central bank isn’t alone. Remember when Mark Carney was Bank of Canada Governor, and warned about this repeatedly?
We’ve also heard from several groups, including the International Monetary Fund, the Organization for Economic Co-operation and Development, and, most recently, the Bank for International Settlements.
“This reinforces that debt levels in Canada are high and are expanding rapidly, potentially leaving the country accident-prone in the event of another financial crisis,” said HSBC’s Mr. Watt, citing Wednesday’s numbers.
Q: But household net worth is also rising?
Right. Net worth rose 2.5 per cent in the third quarter to $10.1-trillion, or $278,200 on a per-capita basis.
That was driven largely by higher stock and property values.
“Despite the rise in the household debt-to-income ratio, the third quarter marked an overall improvement in the household balance sheets, as rising asset values and low interest rates helped offset higher credit balances,” said Toronto-Dominion Bank economist Diana Petramala.
“Asset values will continue to rise sharply with the recent rebound in the TSX/S&P index and continued growth in home prices, but households are starting to lose the support of a low interest rate environment,” she added.
“The five-year government bond yield has jumped 50 basis points since the U.S. election and borrowers have so far passed nearly 20 basis points of that increase onto consumers.”
Scott Hannah, chief of the Credit Counselling Society, noted that these numbers come just as we’re heading into the holiday shopping season.
“Low interest rates are helping to keep the economy under control, but this isn’t something that will continue for a prolonged period of time,” he said.
“It’s tempting to take out more loans and use up credit since interest rates are so low, but when interest rates increase, it’s going to leave many Canadians in greater financial difficulty.”
Q: Could the debt burden grow even fatter?
It could, and it will.
“The rise in the debt-to-income ratio was modest, when set against activity in the resale market, as debt growth remains much slower than the 10-per-cent to 11-per-cent pace recorded during the 2004 to 2007 boom,” TD’s Ms. Petramala said.
“However, credit growth is estimated to clock in at 5.6 per cent in 2016, the sharpest gain since 2011. This pace of credit growth is likely to push the debt-to-income ratio up a further three percentage points by the end of next year, to near 170 per cent.”
Q: Could this affect the economy?
Like the answer above, it could, and it will.
“Lofty debt levels and rising interest rates are likely to put some downward pressure on both consumer spending and housing activity, holding economic growth below the 2-per-cent pace through 2017 and 2018,” Ms. Petramala said.
It also means that this is going to remain on the Bank of Canada’s radar, though it’s not likely to do anything about it, leaving that issue to governments.
“The rise in the debt-to-income ratio is ostensibly the highlight of today’s snapshot of households’ financial positions, notably as the uptick occurred despite an outsized boost in personal incomes attributed to the child care benefit payments that began in July,” said Royal Bank of Canada economist Laura Cooper.
“Encouragingly, the household saving rate did surge by a full percentage point over the period to reach its highest level since Q1/01,” she added.
“That said the further deterioration in the oft-cited debt metric will serve to strengthen the Bank of Canada’s appraisal that elevated household indebtedness remains a key vulnerability to financial stability.”
Q: What about government debt?
“While most attention on rising debt loads in Canada is directed at households, we would just point out that governments are still the reigning champion in the debt world,” said BMO chief economist Douglas Porter.
According to the Statistics Canada report, gross debt among all Canadian governments climbed to 117.7 per cent of GDP in the third quarter, up by more than two percentage points in a year.
That’s the fattest since the first quarter of 2000, according to BMO, though slimmer than the 135.5-per-cent postwar peak.
“Yes, apologists would sputter, but net government debt is 43.2 per cent of GDP,” Mr. Porter said.
“Yes, we would respond, but ‘net’ household debt is sub-zero, since assets are now six times larger than debt.”
Stocks mixed
Global markets are mixed so far.
Tokyo’s Nikkei gained 0.1 per cent, while Hong Kong’s Hang Seng tumbled 1.8 per cent, and the Shanghai composite 0.7 per cent.
In Europe, London’s FTSE 100 was down 0.1 per cent by about 7:55 a.m. ET, though Germany’s DAX and the Paris CAC 40 were up by between 0.5 and 0.6 per cent.
New York futures were mixed.
How markets closed Wednesday