Canadian Household Debt Continues To Rise

A recent study by Statistics Canada confirmed that the amount of debt held by Canadian families has gone up, with most of the increase coming from families with children under 18. Between 1999 and 2012, the average debt to income ratio increased from 0.78 to 1.10. The increase in debt was possible due to an increase in asset value, with debt to asset values falling from 0.27 to 0.25 over the same period. They were also not equally distributed, with the largest increase in debt exposure held by income earners between the ages of 35-44. The increase in debt is symptomatic of a climate of years of low interest rates. Most troubling of all, the increase in household assets that is driving the debt increase fails to impact people without significant assets; university students and recent graduates.

The Survey of Financial Security (SFS) has been run three times by Statistics Canada, first in 1999, then in 2005, and lastly in 2012. It is a comprehensive survey of Canadians living in the provinces, asking questions related to income, large assets, and large liabilities in the household that would affect the financial stability of the household. The survey also collects demographic data such as the age of members of the household, education, languages spoken, and immigration status.

The survey found that between 1992 to 2012, on an annualized basis, the average Canadian has taken out 32 more cents of debt on every dollar earned over the year. The largest gains went to families with children under 18, where "median debt more than doubled" while "median assets in these families increased by $245,100 (or up 86%)." Among nuclear families in the 55-64 age group, median debt rose by $23,100, compared to a $252,700 increase in median assets.

What does this mean for Canadian homeowners? Are they becoming more comfortable with borrowing against the equity of their homes? In an economy filled to the brim with cheap credit, there is certainly no shortage of capital available for financial institutions to borrow. The prime rate for mortgages is 2.85%. The overnight interbank rate (the market rate financial institutions use to borrow from each other) in Canada is 0.75%. With rates like these, why would a financial institution not want to charge 19.99% on credit card debt? Even if the credit card holder defaults, they have made a tidy profit on their investment. And then, when threatened with bankruptcy, financial institutions are more than happy to offer home equity loans at 2.85%. As long as the borrower keeps paying, the lender is making money.

A populace content with offloading more of their debts to a mortgage would certainly explain the rising debt to income ratio. Since mortgages are secured against the value of the home, it would explain why the debt-to-assets ratio has remained constant. Since a mortgage is secured against the value of the home, financial institutions would be limited to lending against the value of the home.

So what can we do to fix this situation? According to an insider in the Mississauga mortgage market, the solution involves regulating unsecured debt. So far, the government has made strides in regulating the mortgage market. An optimist would say that this has been to create a more fiscally sustainable housing market. A cynic would say this was reactionary pandering to get votes following the 2008 mortgage crisis. The truth lies somewhere in between. However, the same measures that have made it more difficult to get mortgages have made it easier to get unsecured debt, increasing incentives to consolidate debt in mortgages.

Another solution to this problem is to increase information available to the government with regard to unreported income. Current mortgage regulations allow pre-approval of mortgages with either notice of assessment, or 12 months of previous bank statements. If implied income on the bank statements does not match the income reported on the notice of assessment, there is currently no way to verify such information. Consequently, mortgage regulation is open to loopholes where unreported income can slip through the approval process. Reining in such practices would ensure a fairer debt market, ensuring that the debt to income ratio matches the level of risk in the economy. The trouble with holding debt is that if the economy falters, the failure of people to hold incomes steady enough to pay off their debts could result in financial ruin.

But enough economics, what do these statistics mean for us students? Statistically, they mean that between 1999 and 2012, total debt for students has risen more than the median trend, with assets rising less than the median rise. The two best pieces of advice are to obtain a basic education in finances, and to engage in conversation about taxation in Canada. Being aware of loopholes in our financial system, and understanding why those loopholes exist will allow us to have more productive conversation about economic issues in Canada, and how best to create an efficient government and taxation system. If we lose faith in our tax system, we lose the ability to fund the government, and so lose the ability to fund government services. This would be detrimental to us all.