Pamela Heaven | Financial Post Oct 30, 2012
There’s a lot of horror stories circulating lately around the latest data showing that Canadian household debt to income ratio has hit 165% — not just a record high, but also beating the bubble peaks in the United States.
Gluskin Sheff chief economist David Rosenberg, however, has taken a closer look at the figures. Here’s his five reasons why the panic may be a bit overblown.
1) Canadian debt/income ratio isn’t as bad as it looks. Because Canadians pay for their health care through their taxes, their disposable income is distorted relative to the U.S. In terms of personal income, the ratio is actually closer to 118%, rather the scary 165%.
2) Canadian household debt relative to assets (19%) and net worth (24%) is below prior peaks of 20% and 25%, respectively. Rosenberg estimates Canada would need to see a 20% drop in the housing market to get net worth/income ratio down to the U.S. level.
3) Canadians have more equity in their homes — 69% of the value compared with 43% in the U.S. “This equity gap is a prime reason why Canadian household net worth/income ratio (at over 500%) is some 35 percentage points above U.S. levels,” Rosenberg writes.
4) Canadians are better able to service their debts. Canadian wage growth at 4% a year is about double what it is in the U.S. — a rise that pretty much matches the average interest rate they are paying. Meanwhile, debt growth has slowed to its slowest in a decade — showing that balance sheets are improving “without the painful deleveraging that has occurred south of the border.”
“To be sure, if the Bank of Canada feels compelled to raise rates that would be a different matter, but that is a long way off,” he said.
5) The debt-servicing ratio in Canadian households is now just over 7% — a level it has only been below in the past 15% of the time. So even though Canadian interest rates are 75 basis points higher than in U.S, it is not hampering our ability to handle debt.