Photo: James Bombales

For months now, reports have found that Canadians have some of the highest household debt levels in the world. But one pair of experts think things might not be as bad as they seem.

“Household debt in Canada is seen by some as unsustainably high and a source of vulnerability for the financial system,” writes National Bank chief economist Stéfane Marion and senior economist Matthieu Arseneau, in a report released today. “But the international evidence suggests that Canadian household leverage and home prices are not abnormal.”

Marion and Arseneau argue that, given Canada’s fundamentals, the country’s ratio of household debt to disposable income is relatively conservative.

While some commentators consider high Canadian home prices a cause for concern, Marion and Arseneau point out that the price of a downtown apartment in Vancouver and Toronto — as seen in the above chart — “does not seem extreme by international standards.” The cost of a 645-square-foot apartment in Vancouver and Toronto sits well below international destinations like London and New York.

The pair also question whether Canada’s debt-to-disposable-income ratio is a actually a red flag. “True, Canada’s debt-to-disposable-income ratio is at a record high,” they write. “Yet many countries have higher ratios. Is Canada’s ratio excessive in relation to its fundamentals?”

Canada is uniquely positioned when it comes to the income and borrowing capacity of its labour force. As indicated in the above chart, the share of Canadian working-age population with jobs is the second largest in the OECD.

Marion and Arseneau write that population growth is a key factor in household formation, and that Canada’s growth is the fastest in the OECD. Up to 70 per cent of the country’s population growth comes from immigration, while 20 per cent of the current population is foreign born. What’s more, Canada is set to raise its annual immigration intake by 13 per cent by 2020.

More than 60 per cent of this annual inflow of residents are “economic category” admissions, who are selected for their ability to become economically established. This stands in stark contrast to the US’s 13 per cent and Germany’s 4 per cent.

That means than in 2015, more than 170,000 permanent residents were workforce ready, as shown in the above chart. As Marion and Arseneau write, “These are the immigrants most likely to find jobs, form households and, ultimately, buy homes. More than 60 per cent of Canada’s foreign-born population has post-secondary education, the largest proportion in the OECD.”

Marion and Arseneau point out that the households with higher education are more likely to maintain a steady income stream. More than 60 per cent of Canadians aged 25-34 have a post-secondary degree, the highest in the OECD.

“This education gap helps explain why the homeownership rate in Canada for people younger than 35 is almost 10 percentage points higher than in the US,” they write.

All of this suggests to the National Bank economists that Canadians shouldn’t be too concerned about their household debt levels.
“Our analysis suggests that the ratio of household debt to disposable income in Canada is relatively conservative,” they write. “This probably reflects the cumulative effect of all actions taken to date to mitigate the vulnerability of the financial system to household indebtedness.”

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