Household debt is under control in Canada, Fraser Institute says - Action News
Home WebMail Wednesday, November 13, 2024, 06:11 AM | Calgary | -0.3°C | Regions Advertise Login | Our platform is in maintenance mode. Some URLs may not be available. |
Business

Household debt is under control in Canada, Fraser Institute says

A Fraser Institute report has a new message about Canadians debt levels stop worrying because we can handle it.

Headlines about a crisis are 'overblown' as Canadians manage their debt well

What debt problem?

9 years ago
Duration 6:47
Philip Cross, a former analyst at StatsCan, explains why Canadians are not in trouble with household debt

A Fraser Institute report has a new message about Canadians' debt levels stop worrying because we can handle it.

Philip Cross, a former chief economic analyst at Statistics Canada, agrees that Canadians are carrying record levels of debt but says that may not be a bad thing.

In most cases, debt is being used for useful things, like getting an education, paying for a home or starting a business all investments in the future, Cross said.

We've created an environment where we've said 'here's free debt,' why would we be surprised when people keep using it- analyst Philip Cross

That's good debt, Cross told CBC News. "We've created an environment where we've said here's free debt, why would we be surprised when people keep using it?" he added.

Cross said headlines about the crisis in Canadian debt levels are "overblown."

"Most Canadians are managing their debt levels responsibly, with no evident strain to either their incomes or their balance sheets," he wrotein a report issued Wednesday.

Because interest rates are so low, the cost of servicing debt is dropping, even though the ratio of debt to household income is at 163 per cent, he says in his study.

No signs of risky lending

Canadians are locking into low rates to pay down the mortgage and consumer credit, the more risky kind of debt, has slowed down since 2009, Cross said. Meanwhile, both incomes and net worth are rising along with debt.

He says there is no sign of banks lending in risky ways to people with low incomes who cannot manage their debts.

"I'm not worried about higher interest rates because central banks have made it clear that when they do get around to raising interest ratesthey'll do it in a very measured manner," Cross said.

Cross attempts to put some historical perspective on consumer debt, pointing out that no one has determined the right level of debt to household income.

"Consumer credit is such a new device that debt has hit a record level in almost every year since 1961, so it is difficult to judge what is the optimal level," he said in the report.

Canadians have higher debt to income ratios than the U.S., but much lower than some European countries, including Norway which has debt to income ratio of 201 per cent.

What is the right level of debt?

Much of the alarmist rhetoric around debt is a generational divide, Cross argued. People who grew up in the Depression and during the Second World War believed saving was virtuous and debt a huge risk.

Later generations are more comfortable with debt, and most learn to manage the various forms of debt, he said.

The other reason rising debt is seen as a crisis is the U.S. financial meltdown of 2009, when highly indebted households had to default on their mortgages.

"The problem in the U.S. wasn't their overall level of debt. The problem was a small number of people were holding a lot of debt and they couldn't repay it. It's the distribution of debt, not the overall level that matters," Cross said.