GATINEAU, QUE.—Louise Lalonde had found a spot for her car in the far reaches of the parking lot outside the Best Buy and joined the crowds drifting into the electronics store in time for the Black Friday sales.
But this was not a frenzied trip of maxing out her credit card for Lalonde.
She came with a plan. Get in, get out, with only a PlayStation for her 11-year-old grandson for Christmas. And pay off her credit card right away.
Across the street at Gatineau’s Promenades mall, Nora Mulligan also had a strategy to keep her spending in check. She had shopped throughout the week for gifts and was now back with receipts in hand so she could claim the “vendredi fou” discounts for her purchases.
She says it will take her two months to pay off her credit card, but she is clearly on top of it.
They are classic Canadian shoppers — conscious of their debts, frugal in their choices, responsible in paying off their credit cards, and at the same time fuelling the Canadian economy year after year. But Canadians as a whole have also fuelled a steep increase in consumer debt, sending it to levels never before seen.
Canadian consumers have borrowed and borrowed, leveraging their homes and rarely hesitating to pull out their credit cards, using their purchasing power to coax the Canadian economy out of the depths of the recession a decade ago and fuelling much of country’s growth since then.
Household debt has soared to the point where pretty much every report card on the Canadian economy puts a big red circle around the debt-to-income ratio, which is at a record high. What we owe has mushroomed faster than what we earn, while our savings are at rock bottom.
Luckily for the Canadian economy as a whole, the borrowing binge shows few signs of evaporating — despite all the warnings that our debt habits were unsustainable. This is now who we are: heavily indebted, for sure, but with a penchant to buy sensible shoes and houses that appreciate.
Even as we import the American consumer culture and have come to gently embrace the conspicuous-consumption fever of Black Friday, we do it in our own Canadian way — with caution.
“If anything, they feel like they’re stretching the dollar at this point,” says Steve Medalsy, owner of a pop-up sweater shop in the mall. If taking on some debt eases the way, then he’s all for it.
“It’s something that works for business.”
We all hear that the debt-to-income ratio is sky-high. CIBC economist Benjamin Tal jokes that it should be part of the citizenship test.
Question: what is Canada’s most alarming financial statistic? Answer: the debt-to-income ratio, now hovering near a record high of 177. That means Canadians owe $1.77 for every dollar of disposable income. The ratio is generally higher for people in low-income brackets. More than $2 trillion in total.
But the ratio has just edged up over the years, not skyrocketed, Tal notes. It took almost 10 years for the ratio to rise from 145 per cent to today’s 177 per cent. And he points out that a main reason for the increase is stagnant wages — and not because Canadians are frivolous borrowers.
Still, there’s no doubt the debt mountain is high. But other indicators say we can handle it.
For one, we generally spend our borrowed money wisely.
Our wealth or personal net worth, for example, has surged over the past decade. Measured as a percentage of disposable income, net worth has risen from about 600 per cent in 2010 to 800 per cent nowadays.
“Households are much richer than they used to be,” says Jean-Francois Perrault, chief economist at the Bank of Nova Scotia.
That’s true across income classes, and especially true for people in Toronto and Vancouver.
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Meanwhile, household borrowing continues at a respectable pace, expanding at about four per cent a year. That’s not as intense as during the overheated housing markets of 2015 and 2016, but it indicates that people wanting to take out a mortgage or run up their credit cards aren’t hitting a wall.
Mortgages in arrears, according to the Canadian Bankers Association, are relatively low, at percentages equal to those before the financial crisis.
That’s despite the now-commonplace practice of homeowners leveraging their homes to make other purchases, either by taking out lines of credit against their homes (HELOCS) or refinancing their mortgages.
The Bank of Canada has been keeping a close eye on this type of credit, and it’s not raising big red flags.
In a paper published in September, central bank researchers found that such equity extraction, as they call it, peaked at $89 billion in 2017 and dropped in 2018. A regular household was taking out $54,000 in refinancing, and generally using the money for renovations. The amounts drawn down through HELOCs were much smaller. And the overall amounts rose in 2015 and 2016 in part because homeowners in Alberta who were suffering from a downturn in oil prices turned to their homes to bolster their cash flow. The borrowing helped cushion the blow.
There’s no doubt things looked a bit rougher earlier this year than they do now. Consumption was sluggish. Insolvencies rose. But over the summer and into the fall, housing prices have come back, and new GDP numbers released Friday show consumption back to its modest old self again.
Wages are climbing at a faster pace than much of the past decade. Labour markets are tight and unemployment is incredibly low. Consumer bankruptcies in the third quarter of the year were 1.5 per cent lower than a year earlier.
Even as the economy slows, that reliable Canadian consumer who has tugged the economy along for so many years is still chugging along.
“There’s a bit more fuel in the tank,” says Robert Hogue, senior economist at RBC.
So why, having imported America’s Black Friday and housing bubbles and mortgage refinancing, hasn’t Canada gone the way of the U.S. a decade ago, when such frivolous borrowing fostered the subprime mortgage crisis?
It’s not just luck or that caution that Canadians are known for. Most economists tip their hat to regulators. After seeing the carnage next door a decade ago, authorities in Canada have taken some aggressive steps to curtail excesses here. Banks face narrower mandates to lend and customers face stiffer requirements to borrow.
It’s important though that, despite our collective caution as we carry so much debt, there are some big risks on the horizon.
The fear of rising interest rates has evaporated recently as it’s clear that rates are on hold or poised to edge lower. But the threat of a downturn, and the loss of jobs, wealth and wages that go along with that, is real. We don’t have much saved for a rainy day. And while our mainstream banking system may be taking precautions against reckless lending, it’s hard to know how much risk non-bank lenders are taking on.
If lenders mirror the strategic caution of those Gatineau shoppers, though, we should be able to muddle through for a while yet.