“This is the biggest risk because it has the potential to amplify the effects of an economic shock,” Bank of Canada Governor Stephen Poloz warned last month in an interview with Les Affaires. What is the risk being evoked here by the head of the Central Bank?
That of the individuals and households indebtedness, whose scale continues to grow from year to year. Judge for yourself – this indebtedness has steadily increased from about 100% of disposable income to 175% in two decades. That is to say that for every 100 dollars of income, each Canadian today accumulates 175 in liabilities, personal and mortgage debt included.
We are quick to pull the trigger when it comes to debt, if we are to believe the Organization for Economic Cooperation and Development (OECD) As illustrated in the graph below, the country ranks in the top third of the most indebted countries. It’s far from Denmark, with a resounding 293% of indebtedness, but the situation nonetheless concerns the Finance Ministers in Ottawa and the provinces, such as Stephen Poloz.
Two phenomena can explain the constant increase in Canadians households indebtedness in recent years. First is the low interest rates that facilitate access to credit for many of them. Then, analysts also point to the high prices of real estate, which translates into larger mortgages and therefore more debt. Should we sound the alarm? Stephen Poloz answers this question in the negative. The Bank of Canada has recently twice raised the prime rate, which should restrict access to credit to some extent. And even if the prospect of a real estate bubble is still very real in Canada, population and employment growth in the country’s major cities are counterbalancing the dangers of over-indebtedness. Canadians are therefore relatively safe… for now!