Canadian household debt has surged to $1.8 trillion, according to a new report by Equifax Canada, sparking concerns about the long-term stability of the country’s banking system. The rise in debt is seen as a potential risk, particularly as international financial bodies warn that Canada’s growing debt levels could pose a threat to its financial infrastructure in the coming years.
Household Debt on the Rise
Equifax Canada’s latest report reveals that Canadian consumers collectively owe $1.821 trillion as of the fourth quarter of 2017, marking a 6% increase from the previous year. This figure includes both mortgages and consumer debt, underlining the rising financial burdens faced by Canadian households.
While 46% of Canadians have reduced their personal liabilities, approximately 37% have taken on more debt, with the average personal debt (excluding mortgages) increasing by 3.3% to $22,837 per person. The report shows that, despite the growing debt burden, most mortgage payments are being made on time, a trend attributed to the combination of low unemployment and historically low mortgage and auto loan interest rates.
International Warning on Canada’s Debt
The report from Equifax coincides with a warning from the Bank of International Settlements (BIS), which monitors financial stability worldwide. BIS indicates that Canada’s debt levels, particularly its credit-to-GDP and debt-service ratios, have surpassed critical thresholds that signal potential risks to the banking system.
Canada’s credit-to-GDP gap currently stands at 9.6, exceeding BIS’s critical threshold of nine. This metric, which measures the gap between the country’s credit-to-GDP ratio and long-term trends, suggests a possible financial imbalance that could expose vulnerabilities in the economy. Alongside Canada, Hong Kong, China, and Switzerland are also flagged as being in the red zone on this metric, with figures far above the critical threshold.
Moreover, Canada’s debt-service ratio, a measure of interest payments and amortizations relative to income, is at 2.9%. This surpasses BIS’s critical threshold of 1.8%, signaling that households may face increased financial pressure if interest rates rise or economic conditions deteriorate.
Broader Implications for the Economy
The increasing household debt and the associated risks highlighted by BIS add to the ongoing concerns about the long-term health of the Canadian economy. Rising debt levels, combined with potential interest rate hikes, could create financial strain for many households, impacting spending and overall economic growth.
The property market remains a significant factor in this equation. While mortgage payments have generally remained on track, the potential for price corrections in overheated housing markets could add to the risk of financial instability. BIS has also noted that developments in property prices reinforce the warning signs for Canada, further elevating concerns about future economic shocks.
With Canadian household debt continuing to rise, the warnings from Equifax Canada and the BIS highlight the increasing risks to the country’s banking system and broader economy. While current low interest rates and strong employment figures provide some relief, the long-term sustainability of these debt levels remains uncertain. Policymakers and financial institutions must closely monitor these trends to mitigate potential risks and ensure economic stability in the coming years.
