Household debt worries exaggerated?

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The Fraser Institute released a study Wednesday questioning the claim that Canadians are being irresponsible with their debt loads.

“Almost every day we hear analysts warning that household debt levels have reached record highs,” Philip Cross, former chief economic analyst for Stats Canada and co-author of the recently released A Longer-term Perspective on Canada’s Household Debt said in an official release. “While debt levels are growing, those warnings should be tempered by the fact that asset and net worth levels are increasing at a far greater rate.”

According to Statistics Canada, household debt to disposable income reached a record high in Q4 2014 when it increased to 163.3 per cent.

But that doesn’t offer the complete picture, according to Cross.

“You have to account for assets when you’re talking about debt levels, otherwise it’s an incomplete story,” he said.

Meanwhile, household net worth increased 7.5 per cent at the end of last year.

And according to the study, assets owned by Canadian households grew by 31 per cent from 2010 to 2014 to approximately $10 trillion. That, compared to a 21 per cent jump in household debt to $1.8 trillion.

 “Much of the concern about household debt in this country stems from fears that we will repeat the U.S. experience of 2007 where high debt levels contributed to that country’s financial crisis and housing meltdown,” Cross said. “But their problems were mainly the result of policies that encouraged high-risk borrowers to take on excessive debt … Canada doesn’t have that problem. Our banks have tighter lending standards and Canadians are clearly managing their debt levels responsibly with no evident strain to their incomes or balance sheets.”

Still, at least one broker is frustrated by how easy it is to obtain credit in Canada.

“I got a call last week about a credit card billing and after discussing it, they offered me a credit increase to $25,000 and I said, ‘sure it doesn’t hurt, even though I don’t need it,’” Ad Lakhanpal of Mortgage Alliance tol MortgageBrokerNews.ca. “I asked if they needed a credit check or proof of income and they said no.

“My problem is I’m a self-employed person, they don’t know my income and I’m being given a credit card and they have no idea how many other credit cards I have.”
 
  • LanceH on 2015-05-21 10:41:04 AM

    I suspect the cc co. that called Ad Lakhanpal had already done a soft check while talking to him and already knew what cards he had, limits, amount owing, and that he was responsible with his use of credit. So no, they don't need to know his income - he's already proven himself. Just a possibility, as I know lots of folks with poor credit that would never get offered that. They made the offer for good reason....

  • lwright on 2015-05-21 10:51:00 AM

    I think that much of the Canadian population is made up of baby-boomers in their twilight years who are earning less income by choice during their retirement. however, many may have the ability to take on debt due to assets they have accumulated be it property or investments. Thus, it is important to look at the complete picture not just income to debt spending vis a vis income.

  • FA on 2015-05-21 3:21:26 PM

    Assets? I suspect these are mostly house/real estate values? LOL - this is the kind of rationale that caused the RE market in the USA to crash and the subsequent credit crunch. These assets only go up in value as long as someone can pay for them... Also remember the early 1990s in Canada? As soon as folks started to bankrupt en mass and walkaway from mortgages all these "asset valuations" just tanked.

  • LanceH on 2015-05-21 3:38:46 PM

    @FA. Except we don't get to simply "walk away" in Canada, as our mortgages are full recourse, unlike the US. I think there was a lot more than that that caused the crisis no? As I recall, there's also been a slight of hand on those stats too. The US 150% of debt-to-income ratio did NOT include their homes!! Just sayin. . .

  • Carsten on 2015-05-26 12:44:21 PM

    The US debt to income ratio is after paying income taxes and before they pay their medical insurance.
    The debt to income ratio in Canada is
    calculated after we paid our taxes that include
    most of our medical insurance costs.
    This calculation was changed several years back (5 - 7 years???) and the Canadian debt to income ratio suddenly jump by about 20% if I remember right. At the time somebody quoted that an average American family of 4 that has to buy their own medical insurance had to pay about $ 1,100 / month. I don't know what the costs are today after Obama Care. Don't get me wrong. Less debt is better but don't we create a crisis here by fudging numbers?

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