Tuesday, December 15, 2009


Greetings all, hope you're all finding a way to stay warm! Apparently this weekend Edmonton was the second coldest place on the planet. Alas the Siberians got to keep their claim for coldest. Anyway, we're just going to do a quick one today, as I'm still recovering from having my mind blown by the Dexter finale.

On Monday Statcan released their latest economic accounts data, and in it is an interesting little ratio we're going to discuss today... debt-to-income. Or more specifically, household debt-to-disposable income.

Canada- Debt-to-income
Here we see the data going back to 1990. Seems Canadians have had an increasing appetite for debt the last two decades, and we're now sitting at an all-time high of 145%. Those that have been following this blog know this isn't earth shattering. As we've noted that over the same period the personal savings rate has also plummeted, so a rise in debt is normally part and parcel when that happens.

Beyond just consumer attitudes, such a change is also no doubt rooted in the decline of interest rates over the same time. As interest rates dwindle, as does the incentive to save... conversely, lower rates also allow consumers to carry larger and larger debt loads. Which in combination with stagnant incomes of course equals a rise in debt-to-income measures.

In the latest Bank of Canada 'Financial System Review', they have a nice presentation of our debt-to-income compared to those of the US and UK (Chart 21 - note, the BoC data is through 2009-Q2, my graph earlier was through Q3). I've been trying to locate those foreign data sets too in an effort to recreate that graph, but have come up empty (I'm blaming the Dexter hangover).

There are several conflicting measures of the US numbers out there, so without knowing exactly what data sets Carney & Co. were using I can't vouch for exactly how good those comparison others are... but for our purposes today we'll give them the benefit of the doubt.

Debt-to-income International
We see in that graph that the US and UK ratios top out around 165% (1.65) and 160% (1.60) respectively in late 2007, and since then have witnessed declines of 5% or better... whereas here in Canada even the recession has shown no signs of slowing the trend toward increased debt-loads.

One should also remember though that the peaks of the US and UK figures also coincided with the peaks of their own housing bubbles... whereas our bubble is still building (on a national level anyway) in light of interest rates plummeting. So, there is no telling just how high our ratio might ultimately climb, and we should also keep in mind that housing bubbles are largely regional. Thus, from region to region that ratio could change drastically. Unfortunately I haven't found any data on the provincial or municipal level to share.

In any case, this is another reason we need to keep an eye on interest rates, because if they shoot up it could spell disaster considering our record high debt loads. The last time fixed mortgage rates were as high as 8% for an extended period the average household debt-load was 45% lower then it is today.... not to mention households don't have nearly the level of savings to dip into as they did then either.

Taking on larger and larder debt-loads is one thing while rates are holding or going down as we've largely witnessed the last 28 years... but we've now hit bottom so there is now where to go but up. And with governments running massive deficits, trying to spend their way out of recession, rates aren't just bound to go up a little... they're bound to go up a lot.