Special Report
A timely analysis of recent economic events
March 12, 2015
Canadian Household Finances:
Return of the Profligate Sums?
Douglas Porter, CFA, Chief Economist • [email protected] • 416-359-4887
Benjamin Reitzes, Senior Economist • [email protected] • 416-359-5628
Canadian household finances have come under renewed scrutiny recently, with debt
ratios rising to record highs once again, and the IMF and others firing off more
warning flares on a hot housing market and the build-up of personal debt. This is the
thanks consumers get for responding predictably to the incentive of record-low
interest rates, and effectively backstopping the economy for the past five years. But
the Klieg-light focus on debt ignores, or at least overshadows, the other half of the
balance sheet. While debt has been rising to record heights, so too have financial
assets, helped by the massive rebound in equity markets and an
underlying rise in savings. While there is plenty of room for
Chart 1
improvement, especially on the savings front, these factors suggest
Low Rates Drive Record Debt
that household finances are not nearly as weak as the dire headlines
(ratio to personal disposable income)
would suggest.
Today’s 2014 Q4 National Balance Sheet Accounts revealed that
Canadian household debt has risen to 163% of disposable income,
up from 162% a year ago. This will, no doubt, set more alarm bells
ringing. But, we would make a few points before the typical rounds
of lecturing and scolding begin. First, the widely-cited debt/income
ratio is not entirely comparable with U.S. measures; adjusted to a
like-for-like basis, Canada’s debt ratio is now 153% of disposable
income, versus the 165% peak the U.S. hit last decade (Chart 1).
Second, it is far from shocking that debt levels are at record highs
when borrowing costs have sunk to record lows. And, third, again
this measure only narrowly looks at one side of the balance sheet,
and ignores the rapid rise on the asset side of the household ledger.
Canada’s savings rate has averaged 4% over the past year, in line
with the 10- and 20-year trend. While this ratio has famously
dropped below U.S. levels (where it has averaged 4.9% in each of
the past two years), it simply does not give the full picture behind
how much Canadians are socking away. The measured savings rate
narrowly looks at how much households are saving from current
income, and ignores unrealized capital gains as well as returns in taxsheltered vehicles.
A more telling measure of savings (and how most Canadians would
likely tally their own financial picture) would be to look at the
change in household net financial assets as a share of disposable
income (Chart 2). This imputed measure of savings has swung
wildly over the years (from anywhere as high as +50% to as low
as -50% in any given four-quarter period, so we smoothed it over a
Household Debt Ratio 1
1.8
1.6
1.4
U.S.
Crossover
1.2
1.0
Canada
0.8
0.6
90
95
1 Households,
00
05
10
15
nonprofits and unincorporated businesses
Chart 2
Two Measures of Savings
Canada
(% of disposable income)
Households
Net Asset
Change 2
30
25
20
15
10
Savings
Rate 1
5
0
95
1
(4-qtr m.a.)
00
2
05
10
15
(y/y chng in financial assets : 20-qtr m.a.)
A publication of BMO Capital Markets Economic Research • Douglas Porter, CFA, Chief Economist • www.bmocm.com/economics • 416-359-6372
Special Report
Page 2 of 3
five-year period), but has averaged roughly double the published
savings rate. Note that the smoothed imputed savings measure has
rarely dropped below the published savings rate in the past 20 years.
In other words, take all cash, deposits, bonds, stocks, life insurance
and pension assets and subtract household debt to derive net
financial assets. These net assets have nearly doubled from the
recession lows to $3.7 trillion by the end of Q4 (Chart 3). For
reference, that works out to $104,000 per Canadian, or 187% of
GDP. We could also have taken into account non-financial assets,
most notably real estate, which would have flattered the totals—
total net household worth rose to an all-time high by the end of last
year to $8.3 trillion, with assets running roughly 4.5 times greater
than the $1.9 trillion in debt. Instead, we will focus primarily on
financial assets given that real estate is a) illiquid; and, b) widely
expected to correct at least modestly in the medium term (in the
hottest markets).
The six-year recovery in stocks from the depths of early 2009 has
played the leading role in the rebound in household net worth. This
highlights the growing sensitivity (vulnerability?) of Canadian
household finances to the equity market. The direct share of
financial assets held in stocks has more than tripled in the past 25
years, from little more than 10% in the early 1990s to a record 38%
in 2014 (Chart 4). This towers above prior decades even with the
impact of the two ferocious bear markets of 2000-02 and 2008-09.
Moreover, equity markets also have a less direct impact on
household net worth through life insurance & pension assets, which
traditionally have been even larger than direct equity holdings by
households.
The strong recovery in household assets has even outpaced the
growth in debt, by at least some measures. For instance, one metric
highlighted by former BoC Governor Carney in a 2010 speech was
the debt-to-asset ratio; “despite the buoyancy of the housing market,
the debt-to-asset ratio has risen to its highest level in more than 20
years”. Of course much of the deterioration in this ratio unfolded
abruptly in late 2008 as global stocks plunged (and Canadian home
prices softened), again highlighting the increased sensitivity of
household finances to equity markets. But, since Carney’s warnings,
the ratio has steadily worked its way down towards its long-term
average (Chart 5). The flip side of the coin is that the absolute level
of household net worth has been on a rising trend, and is now 7.4
times disposable income, up from an average of five times in the
1990s. So, while household debt has been growing more rapidly than
household assets in percentage terms over the past 15 years, some of
that reflects the skewering assets took in late 2008, and the fact
remains that assets are again growing much faster than debt in
absolute terms.
March 12, 2015
Chart 3
Strong Returns Boost Assets to Record
Canada — Net Household Financial Assets
% of Disposable
Income
C$ trlns
350
4.0
3.5
300
3.0
2.5
250
2.0
1.5
200
1.0
0.5
150
90 95 00 05 10 15
90 95 00 05 10 15
Chart 4
Taking Stock
Canada — Households
Equities and Investment
Fund Shares
Financial Assets
— 2014:Q4 —
(C$ trlns)
(% of total financial assets)
40
2.1
35
Equities and
Investment
Fund Shares
30
25
20
1.3
15
Cash &
Deposits
Life
Insurance
& Pensions
10
2.0
5
Other
0.2
90 95 00 05 10 15
Chart 5
Different Measures, Both Improving
Canada — Households
Net Worth
Debt to Total Assets
(% of disposable income)
(percent)
750
21
700
20
650
19
600
550
18
500
17
450
16
400
350
15
90 95 00 05 10 15
90 95 00 05 10 15
Special Report
Page 3 of 3
March 12, 2015
The Bottom Line: Concern over the potential for Canadian
Chart 6
household debt to start flaring higher again was likely one reason
Household Credit Growth Perking Up Again
the Bank of Canada kept its rate cut campaign to one insurance
(y/y % chng)
move. Record debt levels may also be playing a role in dampening
Household Debt Growth 1
consumer confidence and a somewhat more subdued outlook for
15
consumer spending this year, as well as the mounting concern
Canada
among Canadian and international policymakers. However, amid
10
the cacophony of warnings, balance sheet repair is in fact quietly
underway among Canadian households thanks to a slight rise in
U.S.
5
savings and long-term equity market gains. While debt growth has
perked up again, with the Bank of Canada’s surprise January rate
0
cut adding fuel to the fire, the expected cooling in the housing
market—at least in Alberta—should cap mortgage growth (Chart
-5
05
07
09
11
13
15
6). No doubt, Canadian household finances are now vulnerable to a
1 Households, nonprofits and unincorporated businesses;
serious shock (such as a sudden back-up in interest rates and/or
consumer credit and residential mortgages only
broader economic weakness), so any flattening in household debt
growth would be welcome. Still, the singular focus on debt portrays
an overly negative picture of Canadian household finances, which have proven
incredibly resilient this cycle and likely still have enough cushion to provide a soft
landing for spending in the year ahead.
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