Canada’s debt fueled economy chartered into new territory yesterday according to StatCan. The latest national balance sheet show that Canada’s household debt is now greater than the GDP of the whole country.
In plain English? Canadians now owe more than we produce. Since you’re one of our astute readers, you can guess this a s**tstorm in the making. Here’s what we found interesting in the latest numbers.
Canadians are racking up debt at an alarming rate. We increased our household debt load by 1.5% to 167.8% of household credit market debt to disposable income. On average, each and everyone of us owes roughly $1.68 for every $1 we’re left with after taxes.
Note that’s after taxes. The majority of Canadians had their taxes reduced by 1.5% this year. This should have put more money in our pockets. Unfortunately, we didn’t just spend that extra money. We used it as collateral to borrow against. The cost of being a Canadian is growing much faster than the numbers can be engineered – despite what official inflation numbers say.
Household Debt Surpassing GDP
Household debt surpassed GDP for the first time, with residential mortgages mostly to blame. We borrowed more as a country than we produced. Most people are writing this off, since the average net worth increased by 1.9% to $271,300. Here’s the thing about that…
Most of the net worth increase has been a result of real estate gains according to the Government of Canada. The average benchmark composite price of homes reached $574,500. This means a 47% drop in real estate could wipe out almost all of the country’s consumer wealth.
Now, I’m not saying that a drop that large is in the cards for real estate. Heck, I’m not even saying that a drop in real estate is in the cards at all (although the government might be). I’m simply highlighting the dangers of a highly indebted country not diversifying its investments.
Debt To GDP Ratio
Real Estate Pushing Higher
High debt loads leads to an interesting liquidity problem for real estate. Most of that debt people are acquiring is to make money using their home. The only way to get that value is by selling your home, the question is to who?
Reaching a debt load this high is certainly going to make lenders tighten their belts. Combined with rising interest rates, the pool of qualified buyers will shrink. This means Canadians in Vancouver probably won’t be able to buy that $3 million teardown.
Since real estate represented half of all GDP growth in some provinces, we’ll need to import more capital. If you thought foreign buyers were a problem now, you’re probably going to lose your s**t soon. Kind of sheds a little light on why we’re trying to boost high net-worth immigration.
The most interesting thing however – this isn’t something the government can fix. It’s really a consumer based issue. They can make borrowing more difficult, but that will likely just lead to more mortgage fraud. The only way out is spending within our means.
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