Christmas shoppers crowd a Toronto mall in this photo from last December.Kevin Van Paassen/The Globe and Mail
Housing in Canada is crazy expensive, so high mortgage debt is pretty inevitable. That's the common wisdom behind why Canadian debt loads keep rising. It seems to make anecdotal sense, particularly if you live in Vancouver or Toronto, where bidding wars are the norm in a lot of neighborhoods. But here's the thing: debt in Canada is increasingly because of non-mortgage purchases, and in the majority of the provinces, paying off the house is not the biggest problem for consumers.
There were some startling numbers in buried in a report that Statistics Canada put out last week on the provincial economic accounts. On the plus side, the debt-service ratio in Canada – the proportion of income that is spent on mortgage and non-mortgage interest – has been steadily declining over the past several years. Between 2007 and 2011, the ratio slipped from 9 per cent to 7.6 per cent. Over the period, Canadian personal debt certainly rose, but thankfully interest rates declined. It may not be a stable situation – see any speech by Bank of Canada Governor Mark Carney on how interest rates could go up and interest payments also rise – but for now a lot of Canadians see things as manageable.
What surprised me, however, is a mortgage debt service ratio in Canada of 3.9 per cent – just a touch higher than the 3.8 per cent for 'non-mortgage' debt. World housing bust notwithstanding, you can generally find some comfort if your debt is tied to an asset that you expect to go up in value. The fact that so much of our interest payments are going to – what, impulse purchases? – is cause for concern.
The highest non-mortgage debt service ratio in the country is in Nova Scotia, at 4.4 per cent. That is followed by Prince Edward Island (4.3 per cent), Ontario (4.2), B.C. (4), Alberta and Saskatchewan (each 3.6 per cent), New Brunswick (3.5 per cent) , Newfoundland (3.2 per cent) and Quebec (3.1 per cent). Only three provinces – B.C, Alberta and Quebec – have mortgage interest debt service ratios that are higher than their non-mortgage interest debt service ratios.
So what if Canadians owe money for more than just their houses. Is this a bad thing? Not necessarily, and in fact the rise in housing prices probably has a lot to do with the rise in non-mortgage debt. At least some of the non-mortgage borrowing is because of personal lines of credit that are, in fact, secured by home equity. And indeed, Canadians are using low interest rates to buy what they consider to be a better quality of life, whether that is through putting a pool in the backyard or purchasing a car that will take them to work. And hey, they are boosting the economy in the bargain.
In all truth, they are not likely to get called on the borrowing anyway. Yes, Canadian interest rates will go up in a couple of years, maybe enough to sting some borrowers. The rise in rates, however, is going to be muted unless the rest of the world – and in particular the United States – undergoes a particularly robust expansion. The likelihood of that happening is pretty slim: for one thing, the economic problems outside of Canada are deep enough that inflation (which is one component of interest rates) is not going to be much of an issue for a long time.
Should Canadians keep borrowing at the pace that they have been? Maybe not. Still, as long as the rest of the world is a long way away from enjoying the good times, the good times can continue here at home – and apparently they will.
Linda Nazareth is the principal of Relentless Economics and senior fellow for economics and population change at the Macdonald Laurier Institute. Visit her at relentlesseconomics.com