2011 in Review: Household debt

“Credit market debt of the household sector grew in the second quarter, as a result of both higher mortgage and consumer credit borrowing,” StatsCan said.

The Certified General Accountants Association of Canada estimates that total household debt has reached an all-time high of $1.5 trillion.

“The debt of a typical household is rising,” says Rock Lefebvre, CGA-Canada’s vice-president of research and standards. “And the financial situation of certain groups of households is much worse than average and continues to deteriorate.”

Armine Yalnizyan, senior economist, Canadian Centre for Policy Alternatives, says high and rising debt is a serious problem for working Canadians. “If you look at the last 30 years, people have played by all the rules, they’ve gotten better educated and more people are working, yet median economies have not risen, essentially.

“The formula for prosperity did not bear fruit. Get an education, get a job, work hard, what that did was prevent you from losing more economic ground. But after a generation you have to ask what’s in it for future generations?”

Mortgage debt accounts for about three quarters of the average household debt-load, notes TD Bank deputy chief economist Derek Burleton. However, households have been attracted to lines of credit, he adds, since the variable-rate pricing of these products has enabled consumers to reap the benefits of extraordinarily low short-term interest rates.

“This highlights the growing vulnerability of household balance sheets to unanticipated events,” Burleton says. “While much of the debt has been used to finance an offsetting real estate asset, the truth of the matter is that asset values go up and down in value but debt only declines when principle payments are made.”

“The fear I have going forward is that there’s no way interest rates are going to stay this low for the long term,” says Yalnizyan. “So it means even more indebtedness going down the road because you’re paying more to service your debt.”

Some economists have pointed out that although debt is climbing, the increase is essentially offset by gains in assets and net worth, which rose to $186,900 in Q2, up from $185,300.

“I expect household debt levels will grow more slowly in the next decade as the population ages and the labour force grows more slowly,” said Central 1 Credit Union chief economist Helmut Pastrick in an Advisor.ca commentary. “A rising debt-to-income ratio is not necessarily a bad thing because debt can be good if it is accrued for useful purposes and if it is held by people who can afford to repay it.”

Advisors tend to take a more critical view. Halifax-based Stephanie Holmes-Winton agrees that slowing access to home loans or access to home equity would be a mistake, leaving most Canadians with far fewer and more expensive options, but she adds that a job loss or other sudden life crisis could leave people with no choice but to fail to make additional payments on debt or at worst, default.

“Then, Canadians could find themselves trapped with far too much high interest debt,” Holmes-Winton wrote for Advisor.ca earlier this year.

Read: Flaherty tightens mortgage rules

Doug Watt is an Ottawa based writer and editor.