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Drowning in debt


It is hardly news that Canadian households are deeply in debt. Total debt is now (2016) at a near record high of 172.1% of household disposable (after tax) income.

However, Canadians hold much more in assets (mainly housing and financial investments) than they owe to the banks and other lenders. Average net worth in 2016 was 867.6% or almost nine times as much as disposable household income.

So, no worries?

The key problem is that the households which are heavily in debt are not necessarily those with high levels of assets. As was confirmed by recent data from Statistics Canada, wealth or net worth (total assets minus total debts) is heavily concentrated among the affluent. The top 20% of economic families ranked by wealth hold 67.3% of all net worth.

On December 14, Statistics Canada released new data on the debt of Canadians and the distribution of debt and net saving by household income groups.

In 2016, the top 20% of households had debts of just 128.3% of disposable income, compared to the  overall average of 172.1%. But the bottom 20% of households had debts of 333.4% of their disposable income.

Perhaps most strikingly, in 2016, almost all net saving came from the top 20% of households. Net saving as a proportion of disposable income averaged a (very low) 3.5%. But the bottom 60% of households had zero net savings, meaning that they borrowed more than they paid back over the year, and sank deeper into debt.

Meanwhile, the top 20% of households ranked by income saved 26.1% of their disposable income, and the next most affluent group saved 9.2% of their disposable income.

Looking at the numbers another way, the top 20% of households had net savings of $123.0 billion, while total Canadian household savings amounted to just $39.8 billion.

A more detailed analysis would show that these patterns of borrowing and savings are strongly influenced by age group. But the fundamental fact remains that both assets and debts, and thus overall net worth, vary a lot across the income spectrum.

We should be particularly concerned about the growth of indebtedness on the part of less affluent households, who would be hardest hit in relative terms by any rise in interest rates and, in many cases, by a severe correction in house prices.

One long-standing economic insight that remains valid is that government income transfers to the less affluent will be spent rather than saved, boosting overall consumption and economic activity. Only higher income households are significant savers. 

(Data are for households, adjusted for family size, from CANSIM tables 378-0152 and 378-0154.)

Andrew Jackson is the Senior Policy Advisor at the Broadbent Institute