Canada now has the highest level of household debt among G7 countries, making the economy more vulnerable to any global economic crisis, according to a new report.
In an analysis released on Tuesday, Canada Mortgage and Housing Corporation Deputy Chief Economist Aled ab Iorwerth found that household debt in Canada has been rising “inexorably” compared to other countries.
“At the time of the recession in 2008, it stood at about 80% of the size of the economy, in 2010 it rose to 95%, and by 2021 debt exceeded its size,” he said.
One of the main culprits? Mortgages.
Canadian household #debt has been rising for years – and is now the highest among G7 countries.
In 2021, household debt exceeded the size of the economy, with three quarters of the debt tied up in #mortgages.
— CMHC (@CMHC_ca) May 23, 2023
Iorweth says mortgages make up around three-quarters of household debt in the country.
“Over the last year, interest rates have increased as the Bank of Canada battles inflation,” explained the economist. “Over time, these higher interest rates translate into higher mortgage payments for households when those on fixed 5-year terms renew at higher rates.”
He adds that household debt will only continue to increase unless we address affordability in the housing market.
“So as house prices increase in Canada, households take on debt leading to a rise in the total amount of debt in the economy,” wrote Iorweth, “Longer term, reestablishing housing affordability in Canada will be key to reducing household debt if they want to become homeowners.”
How does Canada compare to other countries?
Iorweth contrasts Canada’s household debt to the United States, which fell from 100% of GDP in 2008 to about 75% in 2021.
The report shows a chart comparing the percentage of household debt in countries from 2010 to 2021.
It found that Australia, New Zealand, and Canada have seen household debt increase from already high levels.
Consequences of high household debt
While Iorweth acknowledges that not all debt is bad, and that it can be a valuable tool, he stresses that having a lot of it can still have significant consequences.
“High levels of debt do most damage when a significantly negative external economic event happens — such as a global economic crisis – which leads to widespread job losses, as discussed above,” he said. “It becomes difficult, if not impossible, for many mortgage holders to service their debt.”
The economist says the CMHC’s concerns over debt are exacerbated by concerns over interest rates in the long term.
“Although the last decade was characterized by historically low interest rates — and slow economic growth that some economists called ‘secular stagnation’ — there is no guarantee that we will return to such a pattern after currently high inflation is addressed and interest rates start to decline,” he added.