Should You Really Worry About Your Household Debt?

Household Debt Worry

Canadians are much more comfortable with the idea of carrying a higher debt level than anytime in the past.

So it’s no surprise that average household debt in Canada has risen sharply during the past year, according to BMO Financial Group’s Annual Debt Report.

The report found that the farther west you live in Canada, the more likely you are to have big debts; Alberta leads the way with rising household debt, which has increased from $72,045 to $76,100 year over year.

By contrast, Albertans’ debt is now at $124,800, up sharply from $89,026 a year ago – nearly twice the average household debt than households in Ontario, which the BMO report puts at $67,507.

High Debt Offset By Higher Wealth?

The good news is that a strong stock market and rising home prices have helped make Canadians richer at the same time.

On a per capita basis, household net worth rose to $222,600 in the first quarter, StatsCan says, thanks largely to the fact that more and more Canadians are continuing to buy homes. Another study, conducted by Environics Analytics, pegs the number even higher, with an average per-household net worth of $442,130 as a result of real estate and investment return upticks.

Real estate sales were 11.2 per cent higher than a year ago led by Vancouver, the FraserValley, and Calgary, while the average price for a home was up 6.9 per cent from June 2013 at $413,215, according to the Canadian Real Estate Association.

Those rapidly growing home sales numbers also help to explain why a much larger number of Canadians hold mortgage debt today than last year; the number of households with mortgage debt grew by 13 per cent in the past year, BMO says, to 43 per cent of all households.

Can Property Value Returns Be Trusted?

But, considering that Canada’s real estate market could be as much as 20 per cent overpriced, any sense of improving net worth may be an illusion, the Fitch ratings agency maintains, predicting a sharp correction in house prices.

“We believe high household debt relative to disposable income has made the market more susceptible to market stresses like unemployment or interest rate increases,” the agency says.

Who’s most at risk? Those between the ages of 34 and 44, according to recent RBC data, which notes that this age group is carrying a ratio of household liabilities to net worth that’s more than twice the average of all ages – with a growth rate to match.

And what’s the driving force behind such a precarious balance? You guessed it – record level mortgages, along with a preference for current consumption at the expense of future consumption, according to RBC.

Too-Generous Mortgage Insurance is Culprit

That’s a bit ironic when you consider that CMHC mortgage insurance actually encourages banks to lend bigger and riskier mortgages than they otherwise would, while allowing many people to buy homes they otherwise couldn’t afford.

If interest rates rose by one per cent, how many among this cohort would have trouble making their monthly mortgage payments? Nobody really knows, but there’s no question that a 20 per cent drop in house prices would put many of them underwater.

Despite Fitch’s dire outlook, Canadian economists generally believe the market is heading toward the hoped-for soft landing. However, David Madani of Capital Economics isn’t among them.

The longer the correction is delayed, the steeper the fall will likely be, he maintains: “Should house prices drop back, as we fear over the next few years, then the resulting decline in household net worth would act as a significant constraint on consumer spending.”

And that wouldn’t be good for anybody.


Related Topics

Debt Repayment / Mortgage News / Mortgages

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