Canada

Canadian Household Debt Dwarfs G7 Peers, Growing Faster Than Emerging Economies

Canada’s household debt grew almost twice as fast as its economy, due largely to its addiction to housing. The country’s household debt to gross domestic product (GDP) made a sharp increase in Q3 2020. A little household debt to drive growth is normal, but the country is embracing it to the extreme. Canada’s ratio of household debt to GDP now dwarfs that of its advanced economic peers.

Household Debt To GDP 

The ratio of household debt to GDP helps give context to the size of debt relative to the economy. If the ratio rises, it means debt is growing faster than GDP. This indicates debt is behind economic growth. If the ratio falls, it means the economy is growing faster than debt. This indicates the real economy is growing, and not just buying future growth.

US Federal Reserve researchers found rising ratios have long-term negative consequences. According to their research, a rise in household debt to GDP leads to about a year of GDP growth. The trade off is for every 1 point increase in the ratio, long-term GDP growth falls 0.1 points.

The ratio gets worse as the debt level gets higher. After household debt to GDP reaches 70%, the drag can increase by up to 3x. This results in a spiral. More debt means lower growth. The lack of growth leads poorly managed economies to try and get people to borrow more. Each iteration of this cycle requires more government and household stimulus to continue.

It also requires more and more debt, for smaller and smaller growth. It’s the economic equivalent of borrowing from a payday lender, to pay your credit card bill. It works a few times, but it’s not a long-term fix. In fact, persistent use can make things a lot worse down the road.

Canada’s Household Debt To GDP One of The Largest In The World

Canada’s household debt to GDP is one of the fastest growing in the world, falling into a textbook trap. Household debt to GDP was 110.4% in Q3 2020, having increased 16.6 points over the past 10 years. Over the past 20 years, the ratio increased almost 49.2 points. Debt grew an average of 80% faster than GDP for two whole decades.

Compared to the US, the divergence is unusually large — but hasn’t always been. The ratio of household debt to GDP is 78.0% in Q3 2020, about 32.4 points lower than Canada. Only 10 years ago, around the Great Recession, Canada was only 1.2 points higher than the US. Two decades ago, in the year 2000, Canada’s ratio was actually 9 points lower than the US. This is far from a long-term trend that’s persisted. In fact, it’s only been like this for less than a decade.

Canadian Household Debt To GDP

The household debt to GDP ratio for Canada and the US.
Source: National statistics, Better Dwelling.

Canadian Household Debt To GDP Higher Than Its Advanced Economy Peers

Canada’s household debt to GDP ratio is also much higher than its advanced economy peers. The UK is the second highest ratio in the G7, at 88.9% in Q3 2020 — a full 21.5 points lower than Canada. The BIS aggregate of advanced economies is 34.7 points lower than Canada. Even the EU, where negative interest rates are stimulating credit growth, is 48.9 points lower than Canada’s ratio. To say Canada has been leaning on sloppy economic growth is an understatement.

G7 Household Debt To GDP

The Q3 household debt to GDP ratio for G7 countries, as well as the G7, Euro area, Advanced Economies, and Emerging Market aggregates.
Source: National statistics, Better Dwelling.

Canada’s Ratio Grew Faster Than Emerging Economies

To really put this in context, let’s compare how Canada fares with the world’s emerging economies. Emerging economies often see this ratio rise very quickly, due to their stage. They’re shifting from a low credit economy, to one where it’s widely available. The leverage is mostly used to increase consumption of goods, increasing employment. This leads to a short-term boom, which levels off as they become more advanced economies.

Global Household Debt To GDP Change

The point change in household debt to GDP from Q3 2000 to Q3 2020.
Source: National statistics, Better Dwelling.

In a highly unusual situation, Canada is dwarfing the kind of growth seen in emerging markets. The BIS emerging markets average has a household debt to GDP ratio of 64.7% in Q3 2020. This is up 45.7 points from 20 years ago. Canada grew 49.2 points over the same length of time. Trading off as many points of GDP as emerging economies, which have double the GDP growth to lose.

Despite Canada acting like an emerging market, this rise isn’t actually creating much economic capacity. Dollars sunk into business development are now fewer than those going to residential real estate. This debt is almost exclusively being used to bid up the price of housing being sold back and forth.

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10 Comments

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  • Winnie The Pooh 3 months ago

    Ponzinomcis. Keep attracting immigrants, and pretend it’s going to be beneficial to them. Only way to reduce these numbers at this point.

    • Winnie The Pooh 3 months ago

      Ponzinomics*

    • Trader Jim 3 months ago

      It would be pretty silly to move to places like Canada if you aren’t already wealthy and made your fortune already. Emerging market economies are projected to be larger than Canada by 2027, and equally as advanced.

      Missing out on the greatest rush of wealth in the next 50 years to be in Toronto and trade real estate to each other is a big mistake if you’re looking for high wealth growth.

      • Jason Chau 3 months ago

        There’s a reason Canada’s trade deals only include one way immigration.

  • Alex P 3 months ago

    I can’t think of how this can possible end badly 🙂

    • Kyle 3 months ago

      Canada’s debt to income ratio will hit 700%, and everyone will still be waiting for a deep pocketed foreign buyer to pay them a trillion dollars for their bungalow.

  • Jack 3 months ago

    Just make all buildable land into another Greenbelt. Then build tiny tree houses in those trees and sell it for million dollar each.

  • Bob Loblaw 3 months ago

    Guys I don’t know if you know this but Toronto and, to a lesser degree, Vancouver are considered to be World Class Cities. This means the price of real estate will only go up, up up. Don’t fret.

  • V 3 months ago

    To all the idiots bidding up houses, please stop, You are devaluing the dollar. When you do this you are devaluing your own money by thinking the asking price is not enough. Start seeing your money as worth what it is instead of thinking it’s worth less.

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