A Longer-term Perspective on Canada’s Household Debt

There is much concern about the increase in Canada of household debt to record levels. However, consumer credit is such a new device that debt has hit a record level in almost every year since 1961, so it is difficult to judge what is the optimal level.

By several metrics, household debt in Canada is not excessive. The burden of servicing debt is at a record low. Debt is often used to create wealth, and household assets and net worth have increased much faster than debt. Despite lower interest rates, the rate of growth of debt has slowed by one-third since the recession.

By international standards, the ratio of Canadian household debt to income is similar to that in the US but below that in many European countries. The problem with US debt leading up to its financial crisis was not that its ratio to income was high by international standards, but that its distribution was flawed, with too much issued by poorly capitalized financial institutions to high-risk borrowers. Lending standards have been tightened in Canada to prevent record low interest rates from tempting people and firms to take on excessive risk.