Canada Housing Boom Took Household Debt To Ridiculous Levels
Canada’s housing boom has pushed one in 10 families deep in debt
The Bank of Canada, which calls households owing more than 250% of their gross income “highly indebted,” said last month that household imbalances remain the biggest domestic risk to the financial system.
Canada’s housing boom created a nation where more than one in 10 families are what the central bank calls “highly indebted,” data from polling firm Ipsos Canada shows.
The share of households with debts greater than or equal to 250% of gross income reached a record 13.5% last year, according to Ipsos, the chart below shows.
“Looking at these figures one would think Canadians are accumulating debt at an alarming rate,” said Michael Hsu, vice president at Ipsos in Toronto. Still, he said “most of the debt Canadians are accumulating is going into real estate and right now the real estate market is holding up quite nicely.”
The Bank of Canada, which calls households owing more than 250% of their gross income “highly indebted,” said last month that household imbalances remain the biggest domestic risk to the financial system. Deputy Governor Timothy Lane said June 26 that while there has been a moderation in household imbalances, policy makers are still “watching very closely.”
Ipsos data shows the percentage of heavily indebted Canadians had fallen to 11.4 in the first quarter. Another more widely tracked sign of consumer finances also shows that debt levels peaked last year and have begun to decline. Statistics Canada reported the ratio of household debt to disposable income fell to 161.8% in the first quarter from a record 162.8% in the third quarter of last year.
Canadians are now much deeper in debt than Americans
In the immediate aftermath of the financial crisis, Canadians were feeling pretty good about themselves. And that was their right.
Canada’s banks weathered the crisis well and bolstered their reputation as some of the world’s soundest financial firms. As US debt government debt levels surged, Canadian government bonds became an investor darling. And the Canadian economy bounced back faster than the US after the crisis, as Canadian consumers and borrowers took advantage of rock-bottom interest rates.
But then a funny thing happened. As the US has struggled with a half decade of piddling growth, housing foreclosures and a credit crunch, US household debt has dropped sharply. Meanwhile, Canadians continued borrowing. Check out this chart from Barclays which captures the dynamic.
Canada’s steady climb is worrisome. Earlier this year Moody’s chopped ratings on a slew of Canadian banks, citing “exposure to the increasingly indebted Canadian consumer and elevated housing prices.” In recent speeches, former Bank of Canada head Mark Carney—who will be taking over at the Bank of England shortly—has issued sharp warnings about the country’s over-reliance on consumer debt. (Never mind that the whole thing happened on his watch.)
What’s caused the spike? A report from published in the Bank of Canada Reviewsuggests that Canadians are responding to rising housing prices by borrowing against the value of their homes.
Significant gains in house prices over this period have eased borrowing constraints for some households by raising the amount of collateral available to support borrowing against home equity. Financial innovation that made it easier for households to access this type of borrowing has probably been another important factor.
Note the two scariest words in that excerpt: financial innovation. Practically every financial innovation since the birth of automated teller machine has involved banks making risky loans to people who can’t pay them back, and then watching the government pick up the tab.