A for sale sign rests on the lawn of a condo building in downtown Vancouver, British Columbia, Thursday, August 2, 2012.Rafal Gerszak/The Globe and Mail
Canadians have entered the debt danger zone that helped trigger real estate crashes in the U.S. and Britain.
The average household now has just 63 cents of disposable income for every dollar of debt, according to figures released Monday by Statistics Canada. That's the highest ratio of debt to income ever recorded in Canada, and more inflated than the levels witnessed in the U.S. and Britain before their housing market collapses in the mid-2000s.
The rise in debt levels comes as Canada's housing market is showing increasing signs of weakness, with more than half of major markets seeing sales drop 10 per cent in September from a year ago and the average national price rising a scant 1.1 per cent over the same period.
In spite of tighter federal mortgage rules and repeated warnings from Bank of Canada Governor Mark Carney, debt levels continue to rise. The worry now from some observers is that a debt-fuelled housing bust could deal a double blow as the global economy stalls.
Mr. Carney reiterated Monday that efforts by Finance Minister Jim Flaherty and the federal bank regulator to deter new mortgages are "still having an impact." That suggests he will wait to raise rates to curb demand for credit.
"We are watching with great interest the sum of those policies and the effect on the evolution of household debt," Mr. Carney said after a speech in Nanaimo, B.C. He said raising interest rates to deflate a household debt bubble would be a "last line of defence."
The ratio of debt to income hit 163.4 per cent in the second quarter, up from 161.7 per cent at the end of last year, Statscan said.
The much higher debt ratio is the result of revisions by Statscan for 2011 aimed at bringing its estimates of key economic data in line with international norms. The new methodology added roughly 11 percentage points to the 2011 debt ratio, previously estimated at 150.6 per cent.
Households are also wealthier, thanks in part to rising home values. Statscan revised its estimate of household net worth to $6.6-trillion in 2011 from $6.3-trillion. Net worth has continued to rise this year, reaching $6. 9-trillion in the second quarter.
"To see these numbers where they're at now is deeply disturbing," said Laurie Campbell, chief executive officer of Credit Canada Debt Solutions, which helps people lower their debt burdens. "We've got some serious issues to deal with in Canada."
Mary Cummins, 31, and her partner are typical of many Canadians – saddled with uncomfortably high debt. The couple found themselves in a holding pattern after finishing university and moving to Toronto in 2008. They lived off credit cards, with most of their income going toward student loans. They eventually found jobs, but even after two steady years of repayment, they still have $81,000 to pay off.
"We'll still be paying this off for quite some time," says Ms. Cummins, a 31-year-old policy analyst for an environmental group.
With the housing market already cooling in many major Canadian cities, Ms. Campbell worries that too many Canadians will soon be scrambling to unload homes in a down market, sending prices tumbling.
"The real scary thing to me is if the housing market tanks," she explained. "If people have to sell – because of job loss, divorce, health, the list goes on – and they can't get what they want, we're going to see a lot of shortfalls."
Some economists fret about the similarities to United States, where excessive debt-income ratios were a prelude to a housing crash.
Debt growth dynamics over the last decade look eerily similar to the U.S. experience, just before their dramatic housing bust," said economist David Madani of Capital Economics.
A debt-to-income ratio of more than 160 per cent was the mark that began the unwinding of housing bubbles in both the U.S. and Britain, said Royal Bank of Canada economist David Onyett-Jeffries.
While the Canadian ratio is "alarming," Mr. Onyett-Jeffries argued that it doesn't necessarily mean Canada is headed for a U.S.-style housing bust.
Several factors play in Canada's favour. Canadians have more equity in their homes (near 70 per cent) than Americans ever did. And high-risk subprime mortgages are rare in Canada, where conservative five-year, fixed-rate mortgages are the norm. Mr. Onyett-Jeffries also said the rate of growth of non-mortgage debt, including credits cards, is already slowing, and the same will likely happen with mortgage debt.
At the end of the day, only rate hikes will convince Canadians to behave more prudently, argued economist Diana Petramala of Toronto-Dominion Bank. "A gradual increase in interest rates by the Bank of Canada over the medium term will ultimately be required to ensure a more sustainable picture for household balance sheets," she said. "With the cost of borrowing at record low levels, there is still a large incentive for borrowing to re-accelerate."
The main contributor to Statscan's revised debt ratio was a roughly 5 per cent reduction in disposable income.
With files from reporters Josh O'Kane in Toronto and Kevin Carmichael in Washington.