With household debt at 17 trillion, a savings rate at a fraction of what it was 30 years ago, and waves of warnings from international banks and Nobel-winning economists about our debt-fuelled housing market, any pretense to Canadian fiscal prudence is relegated to the land of folk-lore and fairy tales.
Canadians have stopped worrying about the future and instead have embraced the debt bomb. What we are seeing is a fundamental shift in our attitudes toward living on credit, one that’s not really that illogical, given money is essentially free. An era of low rates has desensitized borrowers to the risks inherent in carrying too much debt. A whole generation of young Canadians has come of age in an era when no bungalow, renovated kitchen cabinets or TV is ever truly out of reach.
For now Canada’s towering household debt load has the appearance of being manageable, a point which the banking and real estate industries continue to preach with impunity (for now). The household debt-service ratio, the share of income that goes to debt payments, is just 7.17 per cent, about its lowest level ever. But that’s only because of low rates. In 1990 the ratio was 11.5 per cent, at a time when total household debt was $360 billion. Since then debt levels have soared 370 per cent to $1.7 trillion. At the same time interest paid on household debt has gone up just 60 per cent. But here’s the thing; Central banks have consistently proven themselves incapable of spotting bubbles. It happened in the U.S. It will happen here. And when the consensus among economists, and more importantly, borrowers, is for rates to stay low, it’s a safe bet they will be proven wrong.