It really does seem like we’ve been listening to warnings about our debt for far too long, doesn’t it? For at least a year Finance Minister Jim Flaherty and Bank of Canada governor, Mark Carney have been harping on us to lower our debt and to stop taking on any more. They even tightened mortgage and HELOC rules last year in order to get their point across. But do we really have that much debt? And is the amount we do have really too much for us to handle?
First, the bad news. Including credit cards, auto loans, mortgages, home equity loans in Canada, and every other form of debt, our country currently has an average of 151% of debt over our income, meaning that for every after-tax dollar we make, we owe $1.51. This is a huge concern and could spell very bad news, as that number is dangerously close to the 160% average household debt the United States saw before their economy collapsed. But while that may be a scary thing to face, is our data telling the truth? Are we really in that much trouble?
The problem, thinks many bankers and economists in Canada, is that the figure of 151% doesn’t suggest whether or not people are having a hard time paying off that debt. An example that chief-economist at TD Bank, Craig Alexander, gives is this one, “Let’s imagine there’s a household out there that has an annual income of $100,000, but they have a mortgage of $153,000. Do you think that sets off red flags that this house is in trouble? I think most people would say no. [That household is] going to have no trouble meeting [their] financial requirements.” And we couldn’t agree more. But if a person were to be given the two figures alone of – $100,000 in profit and $130,000 in debt – it could paint a bleak picture. And it’s just this kind of inadequate data evaluation that’s leading to this misnomer that we as Canadians are in so much trouble with our debt levels.
David McKay, head of Canadian banking at Royal Bank of Canada, said that the main problem with the debt data is that it doesn’t take into consideration who is borrowing the money, and whether or not they can afford to borrow it. He goes on to argue that much of that data does not include households with high debt-service ratios. And if you consider that banks won’t loan to people who have more than a 40% debt-service ratio (those who have owe more than 40% of their income in debt,) Mr. McKay might be right. Especially when he goes on to prove his point by saying, “What happened in the U.S. is the debt was put on at the high debt-service, risky borrowers. They lent to people who had debt-service ratios of 50, 60, 70, or 100%.”
What we really need to figure out then is who is in trouble, and how many people in Canada are in danger of being in too much debt. And the trouble with that, is that there’s really no way to measure that. So is Ottawa going to find a way to combat that and come up with a truly measurable way to let us know whether we’re actually in trouble or not? Not according to Mr. McKay who says, “Right now, the answer would be a definitive no.”
But do you think this is something the government should just sit on their hands about? Do you think that we should be aggressive in trying to find new ways to measure our debt? Or do you think that by erring on the side of caution – the higher side of debt levels – the government will keep us in a position we can afford, even if it means giving us slightly skewed data to go off of in order to do it?
