According to Statistics Canada, the ratio of household debt to disposable income increased to a record high of 163.4% in the second quarter. The latest figure represents a 1.3% increase from a first quarter level of 162.1%. Red flags over consumer indebtedness have been the main driver behind our governments mortgage rule tightening efforts over the past 4 years. Four years ago this debt benchmark was hovering around the 155% range.
At first blush it doesn’t appear that tighter mortgage rules have been successful in curbing our love for credit. The reality is however, that not enough time has passed to get a sense for the impact of the tighter mortgage rules. Recent reports by Equifax have indicated that the majority of the debt increase has come from unsecured borrowing. Tighter mortgage rules can’t prevent borrowers from maxing out their credit cards and buying new cars.
If Canadian debt levels keep rising, then sooner or later, the debt load will hit the fan. This is especially true now that the Department of Finance has restricted CMHC from offering any refinance mortgages (over 80% LTV) to homeowners. Without the ability to access their home’s equity many homeowners will be faced with the unpleasant choice of selling their home or filing a consumer proposal to creditors.
Although its difficult to assess homeowners’ predicaments based on macro economic indicators, we can all agree that too much consumer debt is a bad thing. Weather it’s by peer pressure, individual fiscal restraint or government intervention, we will see debt levels come down when interest rates go up. What remains to be seen is how consumer will hold up when the tide changes. As Warren Buffet likes to say, “when the tide goes out, we’ll see who’s been swimming naked!”.