High Household Debt Leaves Canada Vulnerable

Canada is vulnerable because of its high levels of household debt and could face a crisis if the economy takes a sharp downturn according to a new report by McKinsey Global Institute. McKinsey studied debt levels in 22 advanced and 25 developing countries for its study titled Debt and (not much) de-leveraging released in January 2015. It concluded household debt levels in Canada are higher than those in the U.S. and U.K., during the peak of the financial crisis in 2007.

According to Equifax Canada, Canadians owe over 1.5 trillion in debt and house poor adults between the ages of 35 and 44 are carrying the heaviest debt load. Canada is lumped with six other countries that also experienced rising household debt – Australia, Malaysia, Netherlands, South Korea, Sweden, and Thailand.

The question of whether rising household debts would tip Canada into crisis rested on several factors, including the wider economy and the ability of lenders to assess credit risk. If the people who borrow and have a lot of debt are high-income earners, then there is less risk and correspondingly if people who borrow are lower income earners or on fixed incomes the risk becomes much higher.

Real risk is only likely if there are significant job losses across Canada in a short period, which results in mortgage defaults – the falling price of oil and a slowing economy has the potential to set off a major debt crisis. A slowing economy and any kind of increase in unemployment makes it more difficult for households to service their debts. Usually they do this by cutting consumption in other areas which contributes to a further slowdown in GDP growth.

Debt levels are rising around the world while economies remain in decline.  As a whole, Canada is not over leveraged compared to other countries. When you look at debt of corporations, government and households put together, Canada has one of the lowest debt-to-GDP ratios. It is when we separate individuals and households that Canadians could be in serious trouble.

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