Consumer Debt on the Rise: Increased by  7.7% in 2014

Canadians can’t seem to get enough of the low interest rate environment. Despite the Bank of Canada sounding the alarm that we’re taking on too much debt, we continue borrow at worrisome levels.  

According to a recent report from credit monitoring firm Equifax, total consumer debt including mortgages increased to $1.529 trillion at the close of 2014. That’s up a sizeable 7.7 per cent from $1.42 trillion at the end of 2013. In fact, consumer debt is up 1.1 per cent in the last quarter alone. 

Household Debt-to-Income Ratio Hits Record High

Not surprisingly, the closely monitored household debt-to-income ratio continues to be on the rise. It’s currently sitting at a record high of 163 per cent. That means for every dollar of income, the average household owes $1.63 of debt – yikes! 

 It’s important to take this number with a grain of salt; it’s just one way of measuring household debt. You shouldn't necessarily panic if your family has a slightly higher debt-to-income ratio than the average, especially if you live in costly housing markets like Toronto and Vancouver. 

What’s fuelling the growth in consumer debt? The top three areas of growth are credit cards, instalment loans and car loans. Most Canadians seem to be fine handling their current debt levels. The delinquency rates – those who’s debt is 90 days or more outstanding – stayed the same or decreased nationwide. The delinquency rate of 1.09 per cent in the fourth quarter of 2014, is the lowest number dating all the way back to 2008. 

Real Estate Represents  the Lion’s Share of Household Debt

When we break down the consumer debt numbers we get a clearer picture of what happened. Nearly two-thirds of consumer debt is mortgage debt. Canadians as a whole owe nearly a whopping $1 trillion on their homes. 

With the majority of net worth for most Canadian families tied up in real estate, this is leaving them at risk for a housing bubble. Canadians should take the warming of Bank of Canada Governor Stephen Poloz serious that the over-valuation of the housing market poses a big risk to the economy. Late last year Poloz made headlines when he suggested our housing market was as much as 30 per cent overvalued. Those with less than 30 per cent equity in their homes could see the equity they've worked so hard to build up disappear in a situation like that. 

The Aftermath of a Lower Prime Rate

The Bank of Canada is caught between the proverbial rock and a hard place. While the Bank of Canada doesn't want us to take on more debt, it surprised the markets by lowering the overnight lending rate to 0.75 per cent in January. Prior to that interest rates had been frozen at 1 per cent for nearly five years. Although most lenders only decreased prime rate by 15 basis points (instead of the full 25 basis points) to 2.85 per cent from 3 per cent, it still remains to be seen if it encourages Canadians to take on more debt.