Household Debt Growth Outpaces Growth in Assets and Income

Perhaps it’s the Christmas spirit. Canadians appear to be putting the warnings to curtail their debt and prepare financially for tougher times on the back burner. This according to Statistics Canada, which just released the disconcerting news that the ratio of household credit market debt to disposable income rose to 163.7% in the third quarter of 2015. That’s up from 162.7% in the second quarter. Credit market debt includes consumer credit, mortgage loans, and non-mortgage loans.

That means that for every dollar of disposable income, Canadians are carrying $1.64 in credit market debt and are leveraged near historically high levels. The ratio of household debt to total assets hit a peak of 19.3% in the first quarter of 2009, during the financial crisis, and has been edging down gradually since then as the growth in assets has outpaced debt. However, now this ratio has edged back up to 17% in the third quarter of 2015. 

A small comfort is that non-financial assets (primarily real estate and consumer durables) rose a modest 1.1% in value during that period and disposable income increased by 0.8%. Net financial assets declined 0.6%, however, and debt was up 1.4%.

That 1.4% climb translates into total household credit market debt of $1,892 billion at the end of the third quarter, consisting of $572.3 billion in consumer credit debt and $1,234 billion in mortgage debt.

It’s an indicator advisors and their clients need to discuss as part of their year-end planning visits. As long as household credit market debt outpaces any increase in asset values and disposable income, Canadians are less well prepared when other things change: increases in taxes, for example, fluctuations in market returns or a dip in real estate valuations.

At the risk of hearing mutterings of “bah humbug” from your clients, consider suggesting some responsible alternatives to increasing consumer debt this holiday season. This could include the gift of donations to their favorite charity, which return a tax saving through the charitable donation credit. Or the gift of a more peaceful retirement with a contribution to their spouse’s TFSA or RRSP.

Most important, however, is the gift of memories: the gift of time to those who love you . . . it’s easy on your credit card, too.

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