Wednesday, April 3, 2013

Is Canada’s Debt Mountain Really That High? by Don Curran

Everyone knows about the enormous mountain of debt piled on the shoulders of Canada’s over-leveraged households. But exactly how high is that mountain?

One frequently cited measure, the ratio of credit-market debt to disposable income, from Statistics Canada, reached a record high of almost 165% in the fourth quarter. That makes household borrowing look like Mt. Everest–particularly when compared to the dwindling debt of the retrenching U.S.

Other measures make it look more manageable, but still daunting–more like a peak in the Canadian Rockies rather than the Himalayas.

Take economists at the Royal Bank of Canada: They recently did a “snapshot” of household finances, which suggests household debt in Canada is sustainable, and likely to remain so.

“The debt to income measure, which people tend to focus on, we don’t necessarily view as the best gauge of overall household financial position,” said David Onyett-Jeffries, an economist at RBC. It’s best to use a number of metrics, he said.

In comparing the situation in Canada with that in the U.S., it’s important to compare apples to apples. Modifying StatsCan’s data to make it more comparable with that of the U.S., the credit market debt to income ratio for Canada comes in at 153.9%, RBC found.

That’s higher than the 138.7% reading for the U.S., but well below the 164.6% recorded by the U.S. just before the financial crisis.

Growth in household borrowing is slowing, RBC says, and will continue to do so in the absence of some major, unexpected shock.

While debt-to-income ratios have hit record highs, net worth to disposable income has as well, reaching a record high at 639% from roughly 550% in 2000.

Debt-service costs are low by historical standards, and likely to remain so, Mr. Onyett-Jeffries said.

The fact housesholds are coping with current debt-servicing costs is reflected in low mortgage delinquencies, which were at 0.3% of all mortgages in the fourth quarter, compared to 3.0% on the U.S.

It’s also apparent in low credit card delinquencies, with Canada at 0.9% of total outstanding credit card debt, and the U.S. at a markedly higher 10.6%.

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