Photo: James Bombales
Canadians household debt levels are higher than any other country, according to a new report from the Organization for Economic Cooperation and Development (OECD).
According to the OECD, Canada’s household debt-to-GDP ratio now sits at 101 per cent, well above the other 35 countries profiled. In comparison, the US ratio comes in at 80 per cent, while Germany and France had ratios below 60 per cent.
“Although in part this reflects strong population growth, these developments may entail significant risk to financial stability given the direct exposure of the financial system to the housing market,” reads the report, acknowledging that as home prices have risen, Canadians have taken on more debt in order to afford their dream home.
The report also cautions that countries with high household debt loads are at a greater risk of a severe recession. But one economist thinks Canadians shouldn’t worry too much about their indebtedness — at least for now.
“These potential debt hot spots are not guaranteed to blow up,” writes RBC chief economist Eric Lascelles in a recent note.
While Lascelles acknowledges that Canadians debt levels are “worrying,” he writes that they are unlikely to lead to a full-on recession.
“We are watching for evidence of rising debt levels, not because it’s likely to create a full-on debt crisis, but because it can be a contributing factor to a cooler economy later,” he writes.
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Not everyone agrees with Lascelles’ optimistic take. Earlier this year, Capital Economics Senior Canada Economist David Madani wrote a note saying that Canadians household debt levels were cause for alarm.
“Now with interest rates on the rise and house prices beginning to fall, there is a risk that large household debt burden might soon turn into a national disaster,” he wrote.
The introduction of Ontario’s Fair Housing Plan in April has seen prices fall in Toronto’s previously red hot market. At the same time, the overnight rate — which influences mortgage rates and sat at a historically low 0.5 per cent earlier this year — has been raised 50 basis points by the Bank of Canada since July, with more rate hikes predicted in 2018.
“Canada’s household debt ratio has risen and surpassed the peak levels observed in the UK and the US around the time of the global financial crisis,” writes Madani. “This suggests Canada hasn’t learnt terribly much from these other countries.”
Still, Lascelles cautions against making too much of rising household debt levels — at least in the short term.
“They are mainly just things that will be lingering in our mind over the next five to 50 years, and cause us to be slightly less risk-seeking than otherwise in our investments, but hardly cowering in the corner either,” he writes.