It has become something of a dreary chorus over the past decade, as financial advisers, central bankers and even Ministers of Finance remind, warn, and even scold, Canadians about the risks associated with their ever-increasing levels of household debt.
That chorus was renewed this month, as statistics issued for the second quarter (April to June) of 2016 showed that the amount of household debt held by Canadians, expressed as a percentage of disposable income, had set yet another record. At the end of that quarter, as reported by Statistics Canada, Canadians households held $1.68 in credit market debt for every dollar of disposable income.
Credit comes in many forms, of course, and it’s important to make a distinction between, in particular, secured and unsecured credit. In the first type – secured debt – the lender “secures” the debt against an asset owned by the borrower, meaning that if the debt is not repaid as agreed, the lender has the right to seize and sell the underlying asset in order to be repaid. Although any asset can serve as security for money loaned (car loans being one example), the kind of secured debt most familiar to Canadians is, of course, a mortgage.
Unsecured debt, by contrast, is money provided to a borrower on no more than the strength of the borrower’s promise to repay – and the best example of that type of debt familiar to most Canadians is a credit card.
The figures released by StatsCan for the second quarter of 2016 with respect to household debt figures includes all “credit market debt”, which includes consumer credit and mortgage and non-mortgage loans.
In virtually every Canadian household that has outstanding debt, the largest such debt is their mortgage, and much of the borrowing which has taken place in recent years has been in the form of mortgage or home equity line of credit (HELOC) borrowing, both of which are secured against the value of the home.
A household, which has a mortgage or a home equity line of credit, therefore, also has an asset – their home – which is worth more than the amount of the mortgage or HELOC and which, if necessary, can be sold to pay off that mortgage or HELOC debt.
There are, however, two risks to such borrowing. The first is that a downturn in the residential real estate market could mean that the value of the home drops below the amount of the mortgage or HELOC.
The second is that while the increased mortgage or HELOC debt of such households is manageable at current interest rates, those rates are at historic lows and will inevitably increase at some (unknown) point in the future.
Canadians who are carrying significant amounts of debt secured against their home do at least have the security of an asset, which could be sold to pay that debt. That’s not the case for those carrying unsecured debt, and the amount of such debt is, in almost all categories, on the increase.
The credit reporting agency, TransUnion, recently issued a report summarizing non-mortgage debt held by Canadians during the second quarter of 2016. That report indicated that Canadians had reached a non-mortgage debt balance of $21,580 in the second quarter of 2016, up by just under 3% from the balance amount recorded in the second quarter of 2015.
The non-mortgage debt held by Canadians was broken down, in the TransUnion report, into four categories: bankcard (credit card) debt; auto loans, lines of credit, and installment loans. The average balances held in each category were as follows:
Bankcard ………………….. $3,925 (up by 2.03% year-over-year)
Auto ………………………… $19,896 (up by 3.20% year-over-year)
Lines of credit …………… $29,649 (down by 0.03% year-over-year)
Installment loans ……… $24,021 (up by 6.31% year-over-year)
It’s easy to become complacent, perhaps, when the amount of Canadian household debt, both in dollar terms and as a percentage of household net income, has increased in a series of small quarterly and annual increments, none of which may seem particularly remarkable on their own. However, a look at the longer-term trend paints a different picture.
In 1990, the amount of debt held by Canadian households as a percentage of disposable income stood at 93%. Over the next 15 years, that percentage rose by an average of 1% per year, until it stood at 108% in 2005. Five years later, in 2010, debt held by Canadian households was, on average, equal to 150% of their disposable income, meaning that such debt had risen by an average of just over 8% per year between 2005 and 2010. And, of course, as of the second quarter of 2016, that debt to disposable income percentage has reached a new high of 168%.
And, one final number which may help to put the amount of debt held by Canadian households in context: a country’s gross domestic product, or GDP, is the total value of all of the goods and services produced by that country in a given time period; for the second quarter of 2016, the amount of household debt held by Canadians exceeded, for the first time, Canada’s total GDP.
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