Last week the household debt ratio fell from 175.4% to 158.2%. For years, Canada’s economic policy makers pointed to this ratio as a key indicator of our country’s financial health. Now, amidst a global pandemic, near Great Recession levels of unemployment, and widespread financial uncertainty, we’re being told this is a positive sign. And while the numbers on paper might spark optimism, a quick peek into the real world tells a very different story.
DEBT DECREASE ON THE RISE
Canadian households owe $1.58 for every dollar of after-tax income to creditors. This is down from $1.75 in Q1. This decrease is due to several factors, most of which are ripples from something that starts with ‘COVID’ and ends with ‘19’.
Reasons household debt is down:
- Consumers opting to pay down debt vs. non-essential purchases
- Reduced travel and vacations
- CERB and government subsidies making up for a loss of income
- Decline in non-mortgage loans and consumer credit (e.g. credit card debt, auto loans)
LOWER LENDING RATES COME INTO PLAY
Once-vibrant urban centres have ground to a halt. Businesses who can are shifting to remote work, while others are forced to shutter their doors. Closed schools have affected home office productivity (as any parent with a child under 12 can attest), and many downtown dwellers are trading their big city postal codes and small condos for rural addresses in an effort to adapt to this new WFH word.
The Bank of Canada set a rock-bottom key lending rate of 0.25% which in turn made way for historically low mortgage rates. Canada is experiencing a housing shortage, an abundance of cheap money, and a growing chasm between the ‘haves’ and the ‘have-nots’. As a result, many big-five experts are predicting that this reduction in debt ratio won’t last long.
PANDEMIC CLOUDS FINANCIAL FORECAST
Canada, much like the rest of the world, is wrestling with the evolving challenges of COVID-19. Just about every industry has been impacted in a significant way that forced major restructuring to handle the increase or decrease in traffic. At the time of writing, many cities, provinces, and even countries are seeing spikes in COVID-19 cases and are teetering on a return to ‘lockdown.’
THE REAL COST OF DEBT
Household debt ratio is a closely watched number used to express a nation’s financial well-being. But at the end of the day, it is often just that — a number. The ratio is an economic model that doesn’t take into account a society’s values and priorities. In Canada, we place a premium on home ownership. For many people, the retirement plan IS their home.
Smart investors know debt, when used properly, is a powerful tool to finance appreciating assets and build generational wealth. Therefore, how much debt one carries is, or rather should be, a personal choice based on current financial status and long-term goals. To say that the household debt ratio is good or bad is extremely subjective during the best of times. Add in the current volatility of the pandemic world and we simply don’t know. For now, we’re watching from behind a mask, with well-washed hands, to see how things unfold.