I was at a meal the other night, talking to “a generation below” who had been making residential property purchases. We somehow got onto the topic of house prices and debt and the whole European debt debacle. What amazed me, and concerned me, was just how unaware they were of consumer debt issues in Canada and the risks these high debt levels posed to the housing market.
Canadians with their very high levels of consumer debt are digging themselves into a quagmire.
The debt of Canadian households and unincorporated businesses stood at 94.16% of GDP and 153% of disposable income, compared to 60.3% and 88.6% at the start of 1990. As a % of GDP, Europe, the area in crisis, has consumer debt of close to 60% of GDP, so Canada is well ahead.
There is simply not enough room to take on anymore debt and to attempt to start paying it off, would severely impact growth. If growth slows, which it is more likely to do with high levels of debt, expect consumer debt to have a secondary impact on the economy and the housing market.
Gross Canadian Government debt (Federal + Provincial) stood at 109% of GDP in the 3rd quarter and non financial corporate debt some 87% to 101% of GDP (or slightly higher using OECD data), using Statistics Canada data and depending on whether you exclude trade accounts payable. Analysis of the impact of excess consumer, government and non financial corporate debt can be found in the BIS Paper – The Real Effects of Debt
Also worth reading is the Bank of Canada’s Growth in the Age of Deleveraging – I would point out that some of the comparisons are slightly dubious, in particular the one showing the growth in total Canadian debt between 1990 and 2011 given the significant government and non financial corporate debt that was around at the start of the period.