Saturday, September 14, 2013

Canadian household leverage still growing

As discussed a few months back (see post), Canadian households continue amass higher levels of debt. At this point in the cycle, consumer leverage should have stabilized - particularly given tighter lending standards imposed by the government. However household credit outstanding as a fraction of disposable income hit another record last quarter.

Source: Statistics Canada

The good news is that Canadians' net worth has been improving and the debt growth remains slow relative to pre-recession levels. That doesn't mean the situation is without risks. Canada's household leverage is now materially higher than that of other nations who love credit, namely the UK, Spain, and the US. The overall consumer debt levels are also rising as a fraction of the nation's GDP.

Source: Statistics Canada

Somewhat surprisingly, Canadian seniors are now getting quite comfortable with high debt levels as well. It's a dangerous trend.
CBCNews: - The increase in debt among seniors was the biggest year-over-year of all age groups.

Jeffrey Schwartz of Consolidated Credit Counseling Services of Canada says the finding on seniors' debt is in line with other reports that show bankruptcies among retirees is on the rise.

"That's what scary about this," he said. "Seniors are carrying more debt into retirement. They are trying to maintain a lifestyle they had pre-retirement but on post-retirement income, and if income has dropped, they are increasing their debt to cover off their spending. It's a very dangerous strategy."

He added another possible cause is that seniors are supporting their grown children in greater numbers.
Furthermore, Canadian households are becoming increasingly exposed to real estate. This makes Canada vulnerable to an economic downturn, as falling property values could quickly erode wealth and increase delinquencies.

Source: Statistics Canada

This rising debt burden could inhibit the nation's economic growth because the consumer is less likely to contribute to any expansion without further debt increases. The currency markets are not ignoring the situation, with the Canadian dollar moving lower (USD moving higher) on the news on Friday.

USD/CAD (source:

Bloomberg: - “The household debt number shows you can’t expect the Canadian consumer to contribute much to Canadian growth, and reflects the troubles the Canadian economy still faces, which is not a positive for the currency,” said Adrian Miller, director of fixed-income strategies at GMP Securities LLC in New York. “Any strength in the Canadian dollar has to be discounted, as the bias is still to the downside as the U.S dollar gains strength with a better economic performance and expected tapering from the Fed.”
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