CLIP
You are listening to a Frequency Podcast network production.
Jordan Heath Rawlings
Does your household by any chance carry some debt? Don’t worry. There’s no judgment here. It doesn’t make you a failure at budgeting. In fact, it just makes you Canadian.
CLIP
Now, a warning from the National Housing Agency, Canadian households have the highest debt levels in the G seven. If a recession or other unexpected crisis takes hold, the CMHC says families and the entire economy will be more vulnerable.
Jordan Heath Rawlings
Canadian households now owe more money than the country creates in GDP, and unless things suddenly become more affordable, it’s hard to see our borrowing slowing anytime soon. And what are the chances of a sudden decline in home prices or interest rates, or the cost of living. Nil. So what do we do about it? How did we end up in this mess? How much debt is too much and how much is just the cost of doing business? And how come we can talk endlessly about the government balancing its budgets, but spend far less time wondering how the government can help us balance hours.
I am Jordan Heath Rawlings. This is The Big Story. Jim Stanford is one of our favorite people to talk to about financial matters. He is an economist. He is also the director of the Center for Future Work. Hello, Jim.
Jim Stanford
How are you Jordan?
Jordan Heath Rawlings
I’m doing really well. Thanks for finding the time for us today.
Jim Stanford
My pleasure.
Jordan Heath Rawlings
I always like to level set at the beginning. We don’t know who knows what. What is a household debt to GDP ratio and what is Canada’s at the moment?
Jim Stanford
That is a mouthful. No doubt about it. Now we all of course measure how much we owe in dollars. That’s just the outstanding amount of debt that we owe to the bank, on our mortgage, to the credit card company for our outstanding balances, perhaps to the car dealer on a car loan, or maybe the government on a student loan. So, you know, we, any household can add up all those different types of debt and come up with a dollar figure. But, how relevant or how worrisome that dollar figure is depends on some things, including how much money you make, as a person. So if you went to the bank to ask to borrow some money, that’s the first question they’d ask you, right? Let’s say what’s your annual income? Because obviously, a rich person can borrow a hundred thousand dollars, no problem. A person of, low income or insecure income can’t. For obvious reasons. So, the ratio of your debt to how much income you make is crucial, for determining whether you can sustainably manage that debt and hopefully pay it off someday.
Jordan Heath Rawlings
What’s a good household debt to GDP ratio?
Jim Stanford
Well, from the economy-wide perspective, that GDP number that’s in the denominator of the ratio, if you like, is a measure of, in a way, the income of the whole economy Like that thing that I just described, where the bank manager asks how much you personally make is relevant for you as an individual. But if you’re looking at the, level of debt in the economy as a whole, then you want to add up the income across the whole economy. And that in essence is what our, our gross domestic product or GDP is. So they, the household debt to GDP ratio is simply how much debt all households in Canada have relative to the income that’s generated by the whole economy. Right now Canada’s household debt to GDP ratio is, about 105%, a little bit over a hundred percent. So, you know, in other words, the total debt added up across, all Canadian families is actually slightly more than the total value of GDP, each year, and that is, that is high. I don’t think there’s any magic number. Economists, you know, don’t know what a perfect, household debt to GDP ratio is. It depends on a lot of things. It depends on things like how rapidly the economy’s growing. It certainly depends on what interest rates are. It even depends on things like demographics. You know, if you’ve got a very aging society, then a high level of debt might be a problem, more so than if it was a younger, society, you know, with more people setting up households and buying homes, et cetera, et cetera. So there’s no perfect number, but there’s no doubt that Canada’s ratio is high.
Jordan Heath Rawlings
And how does our ratio compare to our peer countries in the G7 and and how has it been trending in recent years? I guess I’m trying to get a sense of how much trouble we’re in if we’re in trouble. And I know Canada got some big and not necessarily good headlines for this last week.
Jim Stanford
Right. I’m actually a little surprised that it got the headlines to tell you the truth. Jordan, sometimes, you know, a reporter digs something out and they think it’s, very exciting, dramatic news. But in fact, Canada has the highest household debt to GDP ratio in the G7. So it is high. that’s the, the seven leading industrial countries, significantly higher than the United States and Britain and Germany, et cetera. Our, our household debt to GDP ratio is almost twice as high as Germany’s, which is telling. But it has been that way for many years.
Jordan Heath Rawlings
Oh, really?
Jim Stanford
So this is the, the kind of curious thing. Canada’s had a, a high debt to GDP ratio compared to the G7, for a long time. So there’s nothing in a way new about that. But, perhaps it is more newsworthy, these days because of what’s happening with interest rates. You know, it’s one thing to have a high debt GDP ratio when the interest rate was very low. It becomes more of a worry when we see interest rates going up and every, every household that has a variable rate mortgage understands that painfully right now. Because when their mortgage comes due, suddenly they have to find a few hundred bucks extra a month, in additional debt. So I think it is in a way more of a concern. So in that regards, it, it is newsworthy, but Canada’s status as highest in the G7 is not new. Canada even ranks, high compared to the broader set of industrial countries. If you look at the, let’s say the roughly 40 industrial countries in the world, Canada’s is about the fourth highest. The only, countries that have more household debt to GDP than Canada are Switzerland, Australia and Korea. So we, we didn’t quite make the metal podium there, Jordan, but we came very close.
Jordan Heath Rawlings
What is going on in Canada specifically, and I guess has been going on because you said this has been the case for quite some time, that would have our ratio that high? What’s unique about the economy here or households here?
Jim Stanford
Well, I, I can certainly tell you what’s driven that household debt ratio, no doubt about it. And that is the housing market of course. Housing in Canada is, uniquely expensive compared to most, other industrial countries, and there’s various reasons for that and lots of different theories about how to solve the problem. And ironically, access to credit is itself one of the reasons why housing is so expensive. We’ve had a fairly liberalized and open mortgage lending system, in Canada. The requirements to get a mortgage are relatively low compared to other countries. And then the, the mortgages themselves, of course, we have the, CMHC system, the public mortgage insurance system, which is very valuable in a way for, you know, helping to stabilize the mortgage market. I like this system and it’s very important, but, it does in a way make it easier for people to borrow. And when it’s easier for people to borrow, well then they borrow. But that in turn drives up the price of housing because there’s people suddenly, you know, coming up to a property they like and, and being able to wield more, spending power to try and get it. So in a way it kind of feeds on itself. Rising housing prices cause more borrowing, which causes more high, higher housing prices and so on and so forth. And that dynamic, is the key reason most of that household debt is in the form of mortgages. Then of course you’ve got credit cards and other, other forms of non-mortgage debt, but there’s no doubt the main engine driving Canada’s has been an over over-inflated housing market and. There’s lots of places in the world, of course, where housing, is expensive, but Canada’s relatively extreme and that’s one of the reasons why our debt ratio is higher.
Jordan Heath Rawlings
I think a lot of people, when we use the phrase household debt, their minds immediately go to irresponsible spending or not being able to stick to a budget. But what you’ve just described doesn’t sound like that. It sounds like trying to find a place to live. Is there anything that individual households in Canada should be doing, should not be doing that might be contributing to this ratio?
Jim Stanford
Yeah, I I think you’re right. There is always a kind of moral dimension that isn’t there, or a bit of a, of a judgment, on people when you’re looking at debt, figures, you know, this idea that you should live within your means, and if you knew how to, you know, manage your household’s, finances better, you wouldn’t be in debt in the first place. This of course is a, is a myth, a stereotype, and, and in fact, A certain amount of debt is a good thing. There’s no doubt about it. This is true for households. You, you need to have debt generally to buy a house unless you somehow inherited a bunch of money from your parents or something you have to take on a mortgage. And the same goes for buying a car and in, in some ways, sending your kids to university. Those are all valuable investments to make. And when debt, is used to finance an investment, then it’s productive and healthy as long as you don’t have too much of it, and as long as your income is growing and as long as interest rates are not too burdensome. So I, I don’t think we should describe this in terms of individual failing or individual responsibility. There is no doubt it’s been harder for families to make ends meet over, over the last couple of decades. And, you know, the fact that incomes have been relatively stagnant, in real terms compared to inflation, they’re falling now. I think this does add to the, the pressure of, you know, trying to support your family at a decent standard of living and probably encourages more of that, borrowing so. You know, I, I would like to see the household debt a bit lower in Canada, and I think for that to be achieved, we would need to have stronger growth in household incomes so that people can pay for stuff out of their actual income rather than an out of their borrowing. And we’d need to fix the housing, market somehow, either through, regulations or planning or price controls, in some cases or even the expansion of what I would call non-market housing, in a general sense. Things like, housing co-ops or community housing trusts or social housing where you don’t need a half million dollar mortgage in order to get a roof over your head. Other countries, have a much stronger, much larger non-market housing component, in their housing systems. And that is one of the things that I think has reduced, household debts in those other countries.
Jordan Heath Rawlings
You mentioned that it’s getting harder and harder for Canadians to make ends meet. We’ve covered that a lot on this show. And then you look at higher debt to income ratio for the country as a whole. And I guess what I wonder is, how do we know how that has impacted discretionary spending, for lack of a better term, on a Canada-wide level? Are we spending money less on some things given that our debt is so high right now, as well as interest rates?
Jim Stanford
Well, there’s a chicken and an egg problem there. Jordan, it’s hard to tell which came first. You know, did the debt come first and that constrained the spending, or was the spending very strong and that actually created the debt? You know, and there’s, there’s a bit of both happening right now, so you know, the fact that debt is high relative to GDP, as we’ve discussed, it’s also very high relative to households own income. Like we’ve been using GDP as the, as the benchmark. But, GDP, is much bigger than just the income that households themselves get. If you measure debt relative to disposable after tax income of households, it’s, it seems even bigger. It’s more like 185% of disposable income as compared to 105% of GDP. So that, in a way, makes it look even scarier. At this point because interest rates are rising and therefore the cost of servicing that debt has grown really rapidly over the last year. You know, the Bank of Canada has taken their overnight rate from 0.25% to 4.5%. Now in, in the course of a year. And I suspect we’ve got a couple of more rate hikes ahead of us. That means that the growing interest payments that households are making to the banks, particularly on their mortgages, is going to eat into disposable income. And we are seeing weakness in consumer spending right now in Canada, which is one of the reasons why a lot of economists are worried about a downturn in the next few months.
Jordan Heath Rawlings
Is it dangerous? First to are economy, but also just, to individual households to carry so much debt. I realize high debt is not ideal, but as we’ve kind of discussed, it’s also a, a fact of a normal life. What is the risk here, especially with as you just mentioned, interest rates perhaps still climbing a bit?
Jim Stanford
Yeah, a, a certain amount of debt, Jordan can facilitate good decisions and good investments in building families and sending kids to university. So those are all good things. The challenge is make sure you don’t get too much debt and make sure that you can service and manage the debt, that you have. So that’s why, you know, the loan manager at the bank will talk through, you know, what, what is your income? And they’ll talk through what could happen and how secure is your job? They’ll also talk through what if interest rates go up? Have you got room to pay the higher debt charges and so on to make sure that, you know, you’re not right on the edge and that’s prudent. Now unfortunately, there are a lot of families right on the edge just because interest rates have grown so dramatically, and I think that the Canada’s relatively loose lending standards from the banking system are one of the reasons why households, individually, are very vulnerable right now. So we are gonna see families, failing to pay those debts. So far, the banks have been a bit flexible. For example, households with variable rate mortgages. In many cases, the bank will extend the term of the mortgage, rather than jacking up the monthly payments that are required. So, you know, that in a way gives you some immediate relief, but in reality, what you’re doing there is you’re actually going further into debt to pay for your debt. So it’s a bit of a vicious circle that way, and less interest rates come back down pretty quickly. Eventually you’ll have some families have to declare bankruptcy and lose their homes. Now that’s when it becomes a real problem for the whole economy, not just for an individual household. You know, there’s an old, an old joke, Jordan, if, if you owe the bank a hundred thousand dollars, and you can’t pay, you’re in trouble. If you owe the bank a hundred million dollars and you can’t pay the bank’s in trouble. And we could have a situation like that if the banks experience enough loan losses, from overly indebted households that you start to see things like bank losses, being declared. Then that in turn can cause problems for financial stability if people lose confidence in the banks. That can also cause bigger problems in the real estate market if you have, homes being sold on a distressed basis because the former owners couldn’t pay back the, couldn’t pay back the, the mortgage. We saw that happen in the United States in 2007, 2008 with the beginning of the global financial crisis and the mortgage scandals and so on. We did see a big downturn in the national real estate market in America because of that. That’s a an example of what can happen if you get a kind of uncontrolled failure of many households to be able to service their debts.
Jordan Heath Rawlings
You mentioned you were surprised that this got the newspaper coverage and press coverage that it did. I guess my question is why don’t politicians and the media talk about household debt on a country wide level, more in general. I mean, we hear from our politicians a ton about the country’s spending and the country’s deficit. The United States just spent the last two months arguing over an increase to the the national debt ceiling, but it does feel kind of rare to hear reporting on the debt that individuals are carrying.
Jim Stanford
Oh, that’s a really good point, Jordan. I, I think there’s a real double standard in how we think about debt in our economy. There is a huge amount of focus and I, I would say at times, obsession with the government’s debt. You know, we have debates about whether the government should have a deficit or try to balance the books and how big is the debt. And, you know, the opposition parties try to vilify a government for quote unquote running up the debt. And, you know, we could have a good discussion about how much public debt is appropriate, but there is no doubt that the government’s debt is way, way smaller than either the debt of private households or the debt of private corporations, relative to our GDP. It’s also indisputable the government’s debt is much easier to carry. The government has the lowest interest rates of any borrower. And the government has all kinds of tools at its disposal to make sure that it can repay its debt, whereas individual households and corporations go bankrupt on a regular basis. So government debt objectively is much less of a problem. It’s smaller and easier to manage than private debt, yet we focus on public debt and don’t really think about private debt. Why don’t politicians, pay more attention to it? I think partly because number one, they don’t know what to do about it. It’s, you know, a big, complicated macroeconomic outcome and there’s no obvious easy solution. Number two, I think that particularly given the relationship between household debt and overinflated housing prices, there’s in a way a conflict of interest. There’s so many Canadians who might own their home and either can handle their mortgage payments, or in fact have paid off their mortgage. They don’t mind the fact that households, housing prices are so inflated, they feel rich thinking that their house, gosh, it’s just a modest bungalow, but look, it’s worth a million and a half dollars. Lucky me. So, you know, the idea of coming out and actually trying to prick the housing bubble and drive housing prices down, which, you know, in a way would be the biggest solution to household debt. On the other hand, you’re worried as a politician that will just piss off people who no longer feel as rich because their house isn’t worth as much. So, there’s a push pull mechanism going on there with the politicians that I think complicate how they discuss the household debt problem and any possible solutions to it.
Jordan Heath Rawlings
I was gonna ask you for solutions at the end of this here. This is my last question. I won’t ask you about housing because that we could do five more podcasts on what we could do to solve the housing problem. But in general, and not asking if they should or shouldn’t, what other levers could government pull to help the average Canadian reduce their household debt? And how difficult is that to do on a micro level when everybody makes their own choices?
Jim Stanford
Yeah, it’s difficult to do on a micro level, and then it’s also difficult to do when you’re, you know, when you’re feeling the pinch of debt. In a way, the best solution to the debt crisis is to stop it from growing so much in the first place. And that would involve various things. I think it should involve actual restrictions on access to credit. The banks, have a profit motive to lend you as much money as they possibly can. And that’s good for their bottom line for sure, as long as you pay it back. But I think it’s bad for the economy to have very loose liberalized access to all kinds of credit. Think about some of the things that happen nowadays, Jordan. Think about these, pay by instalment plans that have sprung up everywhere. You know where you can buy anything and then you get an option. Oh, you can pay it off in five easy payments over the next year.
Jordan Heath Rawlings
Yeah. You can do this with things that don’t even cost a hundred bucks now.
Jim Stanford
Exactly. Exactly. And you know what? That same debt, that same debt, people who wouldn’t pass a normal credit test to actually borrow money from a bank like young people, for example, use that a lot. That worries me a lot. It looks like it’s free, but it isn’t free. They’re paying for it and all other consumers are paying for it through the charges, the hidden charges that the retailers and these credit institutions build into that system. That’s just a one example of unregulated liberalized access to credit that I think has fueled this problem. Another dimension of it is what happens to income? You know, the debt to GDP ratio or the debt to disposable income ratio has two parts to it. One is how much you borrowed, but the other is how much you earn. And the fact that wages for, particularly for low income Canadians have been very stagnant, absolutely contributes to the pressure that they feel to borrow money just to pay for the necessities of life. So I think that, again, part of the long run strategy to excess debt is kind of a living wage policy to make sure that an average working person can do the basics of life, including paying for a roof over the head without enormous, indebtedness. And, you know, in a way that’s, trying to build a fair or more equal society, one more people. You know, you’ll still have people who want to borrow money in want something now and aren’t ready to wait for it. But as long as your basics of life can be met through your ongoing income rather than borrowing, I think that takes, some of the, some of the hot air out of this bubble of death.
Jordan Heath Rawlings
Jim, thank you so much for this. It’s insightful as always, and I understand this issue better now.
Jim Stanford
It’s always a pleasure to speak with you, Jordan. Thanks for having me.
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