A Household Debt Worth Paying Attention To

In conversation a few we eks back, Craig Alexander offered a refreshing assessment of household debt and how it is conventionally reported.

Of particular note was his citing of the word "useless."

Statistics Canada had released its latest national figure just before Christmas: we - all Canadians - had pushed national household debt to a record. Our collective debt level had reached 163.7 per cent of personal income.

It didn't take much of an imagination to conjure Toronto millennials doing a gut job on their $1-million-plus semis, thinking, well now, that doesn't sound so bad.

Who isn't carrying $1.60 in debt per every dollar of income?

Alexander is vice-president, economic analysis, at the C.D. Howe Institute. Before that he was chief economist at the TD Bank. "When we talk about Canadian national household debt being at 164 per cent of personal income, that is largely useless," Alexander said. "You're taking the total debt of all people who have borrowed and dividing it by all the income of Canadians - those with debt and those without debt. You look at that and say, well, that's a very strange way of looking at it."

Alexander takes what shouldn't seem a novel approach: assessing the debt of people who, you know, actually have debt.

The economist's report, Mortgaged to the Hilt, was much reported upon when it was published last December.

I suspect it didn't have quite the impact it could have had coming as it did on the eve of the federal government's tightening of mortgage lending rules. (Starting this month, borrowers need to come up with a 10-per-cent down payment of that portion of the purchase price between $500,000 and $999,000. The down payment up to $500,000 remains unchanged at 5 per cent.)

Or maybe readers have been jaundiced by the serial release of cautionary reports. Interest rates are low (historically so).

So let's have dinner at Barque and worry about the whole debt thing another day.

Well, the Ba nk of Canada does not share this nonchalance.

In a speech this week, deputy governor Lawrence Schembri went at it again. There are some talking points we should be paying attention to.

"The level of debt held by Canadian households with a debt-to-gross-income ratio of less than 250 per cent has increased only modestly in inflation-adjusted terms over the past 12 years," Schembri said. So that's the (relatively) good news.

"In contrast, the debt of households with a debt-to-gross income ratio equal to or greater than 250 per cent increased by almost 75 per cent over the same period."

That is not the worst news.

Within that group are those with a debt-to-gross-income ratio in excess of 350 per cent. Most of those are under 45 years of age.

They tend to have lower incomes (predictably) and disproportionately reside in British Columbia, Alberta and Ontario. The size of this group has doubled in the past decade.

Citing Alexander's research, the Bank of Canada accepted his data that "highly indebted households," where mortgage debt to disposable income exceeds 500 per cent, doubled to 10.8 per cent from 5.5. That's half a million households.

Alexander also found that roughly the same percentage of households don't have enough funds in reserve to cover more than a few months of basic mortgage costs.

He keeps slicing the numbers: 400,000 Canadian households have barely one month's worth of financial coverage. And again: 100,000 Canadian households have no financial buffer. None.

"They're just living paycheque to paycheque," Alexander says.

So there's the vulnerability.

How great is the risk?

The bank finds that the most likely trigger would be a severe recession causing a "sharp, widespread rise in unemployment," which in turn would trigger a homeowner's inability to service the debt.

Job loss. Mortgage defaults. Declines in house prices. That's the worst-case cycle.

Her e we get into fuzzy speak. The probability of this happening is low, the bank concludes. But the risk is "elevated," meaning not high, but above moderate.

The bulk of at-risk households are concentrated in high-priced pockets, Alexander says - Vancouver, Toronto.

Indebted millennial mortgage holders may be holding fast to the belief that interest rates will never rise. They might consider another factor: that recessions tend to come around every 10 years or so, and, reminds Alexander, "Ontario experienced all of them."