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debt: canada's borrowing binge

This is part of a Globe series that explores our growing dependence on credit — from the average household to massive institutions — and the looming risks for a nation addicted to cheap money. Join the conversation on Twitter with the hashtag #DebtBinge

Canada’s borrowing binge

In 1990, Canadians owed 85 cents for every dollar of annual disposable income.

Today that number has grown to a record $1.63.

Meanwhile, Canadians are saving just 3.6% of their incomes today – a drop from 12% in 1990.

Static chart for IE

Rising household debt levels have some sounding the alarm.

The [Canadian] economy’s two main domestic vulnerable areas are its overheated housing markets and high household debt.

International Monetary Fund

March 9, 2015

Seven countries today have household debt that may be unsustainable: the Netherlands, South Korea, Canada, Sweden, Australia, Malaysia, and Thailand.

McKinsey Global Institute

Feb. 5, 2015

The total debt owed by all Canadians at the end of March was a record $1.8-trillion, with mortgage debt making up $1.29-trillion.

If you spent $1-million every day, it would take you 2,740 years to spend $1-trillion.

Between 1999 and 2012, most types of debt rose.



Debt by type

Source: Statistics Canada

What is driving this increase?

    Arrow down
  • Overnight lending rate drops
Overnight lending rate chart

Source: Statistics Canada

  • Fuels housing boom
  • Increased mortgages
  • Debt levels rise

Some argue that since asset values have been rising even faster than borrowing, households are at less risk than it appears.

[I] am not understanding this newfangled theory in which debts have real value but assets are worthless.

Stephen Gordon (via Twitter)

Economics Professor, Université Laval

April 29, 2015

The debt-to-total-assets ratio has been fairly stable over the last 25 years. But not all assets (pensions) are liquid. And sometimes asset prices (houses) fall.

These high debt levels leave many Canadians vulnerable to a drop in housing prices, an interest rate increase or job loss.

The most important domestic financial system risk is the inability of highly indebted households to service their debt in the face of a sharp decline in their incomes, leading to a large and widespread correction in house prices. This risk continues to be rated as elevated. The probability of this risk materializing is low, but if it were to materialize, the effect on the economy and financial system could be severe.

Financial System Review: December 2014

Bank of Canada

The Bank of Canada estimated late last year that the Canadian housing market is overvalued by between 10 and 30 per cent.

The most vulnerable are the 12% of households that are “highly indebted,” or have a total debt-to-gross-income ratio above 250%.

They hold about 43% of household debt in Canada.

Who are the 12%

They are younger (21-35)

They have an average income of $65,000*

97 per cent of them own homes

Many live in B.C., Alberta and Ontario, where property values are the highest

*Despite the BoC findings, Ipsos Reid found that they had a higher household income ($107,204) than the general population ($70,917)

People under 55 carry the majority of the nation’s household debt.

Total debt by age group



Debt by age

Source: Statistics Canada

And those over 65 – traditionally the most debt-free – are borrowing more. In 2009, 39% had no debt. That dropped to 33% in 2014.

Nationally, Alberta has the highest average household debt of any province.

Average household debt by province (2014)

Debt by province

Source: BMO Annual Debt Report

Alberta households, we've got the highest debt burden to income ratio in the country. A lot of that is due to the demographics in the province, we've got a much younger demographic, which tends to be more in that stage of life where they're accumulating mortgages and baby carriages and all sorts of things. But you also have very strong income expectation … Even now, when their expectation of their income is rising – they think, next year I'm going to make even more money – they're more likely to take on consumer debt … Now that is kind of unraveling and I think we're moving into a period of consumer caution.

Todd Hirsch

Chief economist, ATB Financial

While Albertans have more debt, they are also more sensitive to how changes in the economy, specifically the decline in oil prices, will affect them, according to a survey that looked at Canadians’ household finances after the price of oil dropped.

It found that Canadians were surprisingly optimistic.

Percentage of households by province who think their finances will worsen (2015)

Financial sentiment survey

Source: CPA Canada

High levels of indebtedness continue to make Canadian households vulnerable to changes in the economy, yet few are taking the financial planning measures needed to prepare themselves for a potentially negative financial shock. A reality check is needed.

Household Finances in Canada: Time for a reality check

Chartered Professional Accountants of Canada