DEBT CRUNCH: POLICY RECOMMENDATIONS FOR ADDRESSING CANADA’S RECORD LEVEL OF HOUSEHOLD DEBT

EXECUTIVE SUMMARY


Since 2008, Canada has not only weathered the


recent financial crisis, but also emerged as a global


example of fiscal responsibility. However, while


our banks, businesses and government remain


strong, Canadian households have continued to


accumulate debt at an unprecedented rate. In the


third quarter of 2010, Canadians’ debt-to-disposable


income ratio surpassed the United States for the


first time since the late 1990s, exceeding 1.5 dollars


of debt for every 1 dollar of income per household.1


While Canadians are enjoying accessible credit


at historically-low interest rates, many are living


paycheque to paycheque, with significant amounts


of their disposable income going to servicing their


personal debts. With interest rates expected to


rise, Canadian households that have taken on too


much debt face a real financial risk. Vulnerability


at the household level could easily translate


into a larger risk for the economy as a whole.


The current high levels of household debt create


two main concerns for the Canadian economy. The


first is the danger of increased defaults on debt and


mortgage delinquencies from highly-leveraged


households. Second, Canadian households would


significantly reduce their spending in the general


economy if forced to address higher interest amounts.




1 Statistics Canada. No date. Household sector
indicators (table). National balance sheet accounts. Last
updated Dec 13, 2010. statcan.gc.ca/daily-quotidien/101213/
t101213a2-eng.htm (accessed Jan 26, 2011).


Personal spending on consumer goods and services


accounts for 58% of the Canadian gross domestic


product (gdp)2 and a reduction in consumer spending


could provoke a “home-grown” Canadian recession.


The Action Canada Task Force on Household Debt


proposes two solutions. First, the Department


of Finance Canada, along with Canada’s banks


and financial institutions, should develop


and implement a Code of Conduct on Lending


focusing on options to improve Canadian


consumers’ ability to manage and repay debt.


Secondly, Changing the Culture of Borrowing focuses


on increasing public engagement through a


national public awareness campaign and financial


self-monitoring options. It should aim to help


Canadians gain a greater understanding of their


financial well-being and to help introduce a


cultural shift in the attitudes and practices


around the use of credit and accumulating debt.


Successfully addressing the financial


vulnerability associated with household


debt requires the participation of all key


stakeholders in the financial system, including


the federal government, the financial sector,


and individual consumers. Introducing public


policy measures now would strengthen the


nation’s economic position for the future.



2 Statistics Canada. No date. Gross domestic product,
expenditure-based (quarterly) (table). Summary tables.
Last updated Jan 6, 2011. www40.statcan.gc.ca/l01/
cst01/gdps02a-eng.htm (accessed Jan 26, 2011).


Since 2008, the world has witnessed significant


volatility and strain on the financial sector.


While over-leveraged countries and financial


institutions have collapsed under the weight of


excessive debt, Canada has not only weathered


the storm, but emerged as an example of fiscal


responsibility. However, the stability of Canadian


banks, businesses and government is not reflected


in the balance sheets of individual Canadians.


Canada’s total household debt is now three times


the size of the national debt—more than 1.5 trillion


dollars in total.3 During the recent recession,


household debt continued to rise in Canada, contrary


to many other nations—including the United


States. In recent months, international bodies such


as the Organization for Economic Co‑operation


and Development (oecd) have issued reports


about Canada’s unprecedented rise in household


debt, a message that has been echoed at home


by warnings from the Bank of Canada Governor


Mark Carney. Despite the warnings, Canadians


were still bigger spenders during the 2010 holiday


season than in 2009, enjoying the benefits of


low interest rates and easy access to credit.4


With interest rates poised to rise, Canadian


households that have taken on too much debt face


a real financial risk. Vulnerability at the household


level could easily translate into a larger risk for


the economy as a whole. Triggers such as rising


interest rates mean more household’s disposable


income will go to servicing individual debt.


3 Statistics Canada. No date. Household sector
indicators (table). National balance sheet accounts. Last
updated Dec 13, 2010. statcan.gc.ca/daily-quotidien/101213/
t101213a2-eng.htm (accessed Jan 26, 2011).


4 Scotiabank. “Canadians Continue to Spend
More on the Holidays in 2010: Scotiabank Study.”
CWN Group Dec 16, 2010. newswire.ca/en/releases/
archive/December2010/16/c5659.html


This not only increases the risk of default, but with


the majority of Canada’s gdp tied to consumer


spending, it will have an effect on many sectors


of the economy. Reducing this risk requires the


participation of all key stakeholders in the financial


system including the federal government, the


financial sector, and individual consumers.


The Action Canada Task Force on Household Debt has


explored opportunities to reduce national financial


vulnerability due to high household debt levels.


After six months of consultation with financial


institutions, credit counsellors, government


officials, economists, and other stakeholders, the


Task Force has prepared the following policy


recommendations in an effort to improve financial


best practices for both borrowers and lenders.



REAL STORIES about REAL PEOPLE


To help illustrate the picture of debt in Canada,


actual situations provided by Canadian credit


counselors are provided in this document. Names


and locations of individuals have been changed.



Andrew & Padma’ s Big Decision


Andrew and Padma are a newly-married couple from


London, Ontario. Andrew, an engineer, and Padma, a


nurse, are looking to buy their first home and to start


a family. While they both earn good salaries, they


are still carrying significant student loans, a car loan


and have limited savings between them. They have


been approved for a mortgage, but have realized


that their decision to buy a house needs to factor


in much more than the just the price of a home.


With the average debt-to-income ratio of


homeowners nearly four times that of renters,


Andrew and Padma aren’t alone in making


difficult decisions about home ownership.

5 Meh, C.A., Terajima, Y., Chen, D.X., and Carter,

T. Household debt, assets, and income in Canada: A
microdata study. Bank of Canada Discussion Paper. June
2009. bankofcanada.ca/en/res/dp/2009/dp09-7.pdf


Read entire report:


http://www.debtcrunch.ca/