As a result, the share of heavy borrowers has soared – to 34 per cent of all indebted households today, compared with 26 per cent in 2007. Among provinces, British Columbia and Alberta have the highest share of heavy borrowers.
Current economic conditions aren’t helping. In Canada, weak wage growth is a key driver of the higher ratios, the bank said. Household income growth was tepid last year, just as inflation heated up. As a result, real disposable income fell 0.1 per cent in the first three quarters of 2011, a 15-year low.
“The economy’s not growing as quickly as everyone thought. Food and fuel are expensive, and housing costs are extremely high, especially in the larger urban areas,” Mr. Schwartz said. “So … the people who haven’t been living within their means and continue to act as consumers are living a lifestyle beyond their grasp. And it’s forcing them to go further and further into debt.”
It finds that the most heavily-indebted are responsible for all of the rise in debt since 2007, and that those who should be saving for retirement and building assets are moving fastest into a financial hole.
“While a crisis does not appear imminent, there are cracks emerging in the financial foundation of Canadians that are likely to impair spending growth ahead,” says the report, titled “Punch Drunk”, by CIBC economists Avery Shenfeld and Benjamin Tal.
Ballooning household debt has made headlines in recent months, and Bank of Canada Governor Mark Carney has warned it is the No. 1 domestic risk to Canada's economy.
Low interest rates have driven recent debt growth. But that's not all – household income growth was weak last year, just as inflation heated up. As a result, real disposable income fell 0.1 per cent in the first three quarters of 2011, the bank said – another reasons why people got squeezed.
High household indebtedness doesn't necessarily mean Canada is facing a U.S.-style crash -- as CIBC points out, Denmark's levels are “light years” ahead of Canada, and so are those of the Netherlands and Switzerland.
But they do bear watching closely, because they suggest more Canadians are financially vulnerable to sudden changes such a job loss, drop in housing prices or increase in interest rates.
Other economists, too, have flagged that it is older Canadians who are piling on debt. In October, a TD report found the 65-plus age group are racking up debt at three times the average pace.
The findings have implications for retirement trends, and consumer spending. “Canadians nearing retirement who should be in their prime savings years are, instead, getting themselves deeper into debt,” the CIBC report said.
“We are already seeing an uptrend in bankruptcies for those 50 and over, but the more material impact will be that this group’s ability to spend could be severely squeezed upon retirement.”
As for heavily indebted borrowers, the study finds virtually all of the rise in debt in the past four years comes from people with a high-debt-gross income ratio. “The indebted have piled on still more debt,” it said.
As a result, the share of heavy borrowers has soared -- to 34 per cent of all indebted households today, compared with 26 per cent in 2007.
Among provinces, British Columbia and Alberta have the highest share of heavy borrowers.
The bank doesn't anticipate any sharp run-up in household bankruptcies. But it does suggest consumers won't contribute much to economic growth this year, just as governments are cutting back. Businesses, therefore, will have to do the heavy lifting in propelling growth.
