Commentary: ‘Irresponsible’ borrowing is not the problem

More and more Canadian consumers and finance industry observers seem to be agreeing that household debt has gone out of control and has reached a point of no return. However, a Fraser Institute senior fellow recently argued that such observations neglect to take a deeper look into the debt story.

In a piece for the Financial Post, Livio Di Matteo noted that the hysteria surrounding current household debt levels—which have exceeded $2 trillion last year—fail to take into account what many Canadians are spending those borrowed funds on.

“Yes, Canadian households have taken on more debt over time. But they have used this debt to finance assets — real estate and retirement savings, for example — that grow over time, causing their net worth to swell, also to unprecedented levels,” Di Matteo explained. “In fact, Canadian household assets rose dramatically from $2.2 trillion in 1990 to $12.3 trillion in 2016.”

“It’s important to note first that the lion’s share of this debt (two-thirds, in fact) is for mortgages while the remaining third is split between consumer credit (29 per cent) and other loans (five per cent),” the academic added. “Moreover, despite the pre-occupation with overheated real estate markets, the mortgage share of total household debt has remained stable.”

Even taking into account inflation, the impact of these developments on household net worth cannot be overstated, as Canada’s total of household assets minus liabilities swelled from $1.8 trillion in 1990 to $10.3 trillion last year.

“As a share of GDP, household net worth rose from 265 per cent to 498 per cent,” Di Matteo said. “While government policy-makers fret over household debt, the irony is that unlike government, household net worth is positive and increasing over time.”

He concluded that debt should be viewed in light of not just how much is borrowed, but also how the money is being utilized to fund each household’s specific needs.

“We shouldn’t be concerned with debt per se, but rather when households cannot manage their debt within the economic circumstances they face. The greatest risks to management of household debt are a) economic shocks that lead to job losses that make it harder for people to service their debt, and b) increases in interest rates that raise debt-servicing costs.”


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