Canadians, you’re more indebted than you think.
Statistics Canada is busy re-evaluating economic data going back two decades as part of an effort to comply with international norms, and a review of household debt shows our debt spending has been severely underestimated.
StatsCan now says household debt amounted to 163.4 per cent of household income in the second quarter, up from 161.8 per cent in the first. But both these numbers are much higher than the estimates StatsCan had provided before; the previous estimate for the first quarter had been 152 per cent, according to Reuters.
The data suggests Canadians may be more vulnerable to a downturn in the economy than previously thought, as Canadians are now carrying more debt than Americans and Brits were at the peak of their housing bubble half a decade ago. Both the U.S. and the U.K. peaked at a debt level of 160 per cent of household income. (U.S. household debt has since fallen to 140.1 per cent.)
By comparison, Canadian household debt amounted to just 84 per cent of income in the second quarter of 1990, the earliest year that StatsCan revised.
Housing market observers have argued that, with record-setting debt levels, Canadian consumers will no longer be able to hold up rising house prices — and they made those arguments before debt levels were revised upwards.
Recent data on the housing market would suggest homebuyers have reached a breaking point. The latest report from the Canadian Real Estate Association shows a 15-per-cent year-on-year decline in Canadian housing resales in September. However, CREA says that Finance Minister Jim Flaherty’s new mortgage rules — introduced this past summer as an attempt to slow down excessive borrowing — are behind the market slowdown, rather than excessive borrowing.
Both Flaherty and Bank of Canada Governor Mark Carney have warned repeatedly in recent months that household debts levels may be growing too high.
"Our economy cannot … depend indefinitely on debt-fuelled household expenditures, particularly in an environment of modest income growth," Carney said in June. "Notably, housing investment rose further relative to GDP in the first quarter, and accounts for an unusually elevated share of the overall Canadian economy."
Carney has warned he’ll raise interest rates if borrowing is seen to become excessive. Bank of Canada executives have been reiterating the warning regularly.
But some economists point out it was Carney’s aggressive move to cut interest rates in the wake of the U.S. banking crisis that prompted Canada’s housing bubble in the first place.
A slowdown in housing could hit Canada especially hard, as the economy has become unusually reliant on real estate development.
According to a report at Bloomberg, construction jobs amounted to more than 7.4 per cent of all employment in Canada in April of this year. In the U.S. at the peak of its housing bubble, construction jobs never exceeded 6 per cent of all employment. (They stand at 4.2 per cent today.)
A recent Capital Economics report estimated a construction slowdown would cost 115,000 jobs across Canada. The report based that on its prediction of a 25-per-cent house price decline.