It's the one piece of economic data in Canada that has drawn more attention than any other in the past year. At times, its presence has served as a gentle reminder for consumers to keep a lid on borrowing. At others, it seems like a warning sign of financial irresponsibility.
That number, of course, is the average measure of household debt in Canada, which recently hit a record 151 per cent of income. That means for every dollar of after-tax cash, the average Canadian family owes $1.51, including mortgages, credit cards, credit lines and car loans.
It's the upward trajectory of the debt ratio that has the Bank of Canada and even the International Monetary Fund concerned. By the second half of next year, some economists believe Canada will punch through the 160-per-cent mark – the same point the United States reached about five years ago, right before the American housing market began to crumble.
But is the three-digit number the best way to assess how indebted consumers really are?
A growing number of economists and bankers say no, and more of them are beginning to openly question whether Canadian debt levels are being studied in the proper way. The problem, say critics of the data, is that while the numbers tell a story of rising debt, they don't show whether Canadians are struggling to keep up with their payments.
“The debt-to-income measure is very imperfect. It's not the ideal measure, but it is the one that gets the most attention,” said Craig Alexander, chief economist at Toronto-Dominion Bank.
“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. If you have a 25-year mortgage, and you only have $153,000 of mortgage debt, you’re going to have no trouble meeting your financial commitments.”
Amid the handwringing over household debt in Canada, banks have started talking to officials in Ottawa about using a different metric to track debt.
“We need a dialogue, and we [are having]that dialogue with regulators and with others, around the total debt picture. Because the one number makes for good press, but it has to be taken in context,” said David McKay, head of Canadian banking at Royal Bank of Canada.
When banks lend money, they use a debt-service ratio that looks at what proportion of a person’s monthly income is consumed by interest and principal payments. Generally speaking, banks don’t want debt servicing to exceed 40 per cent.
Mr. McKay and officials at other Canadian banks argue that much of the lending that has contributed to the 151-per-cent figure in Canada does not involve lending to households with high debt-service ratios.
“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 per cent,” Mr. McKay said.
The average household debt number, which finds its way into news reports across the country whenever it is updated, has become an economic and political football in Ottawa. The banks have an interest in not raising the alarm about debt, since a jittery consumer is less likely to spend or borrow.
But the Bank of Canada also has a stake in the debate. At a time when the central bank is keeping interest rates at historically low levels in an effort to spur business borrowing and investment, the last thing its Governor Mark Carney wants is for already leveraged consumers to gorge themselves on debt, even at these attractive rates.
“What you really want to know is whether people are in trouble – who has the debt and what is their income,” said Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce. “So, the distribution of that debt across income categories, and more importantly, the number of people who are at the margin.
“In other words, who in Canada are already up to their eyeballs [in debt] relative to their income? [That]is what we’re really trying to get at.”
The problem, Mr. Shenfeld and other economists point out, is that such data are harder to come by. In Canada, the data economists wish they had are not tracked by Statistics Canada, and banks rely on poll data collected by Ipsos Reid on debt-servicing levels. That makes tracking the problem harder.
“While we’re seeing a slight rise in some signs of stress, [it’s]nothing like what we saw in the U.S. ahead of their crisis. The U.S. was seeing people miss their third mortgage payment. In other words, they had been lent money they couldn’t pay right at the outset. We have obviously not been seeing that here. So you have to go beyond that.”
While a debt ratio of 151 per cent isn’t necessarily reason to panic, it is not cause for complacency either, Mr. Shenfeld said. “The plus of it is its simplicity,” he said.
Though banks like RBC have talked to officials in Ottawa about using a different measure to track debt, they are so far not getting much traction. “I think the answer would be a definitive no,” Mr. McKay said, meaning the banks and consumers will have to live with the number for the foreseeable future.
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