MNI INTERVIEW: Canada Household Debt Ratio May Overstate Risk

--Consumer-Debt-To-Assets Ratio Shows Stronger Connection Than Income To

Financial Distress

By Greg Quinn and Jay Zhao-Murray

     OTTAWA (MNI) - Canada's widely-followed measure of consumer debts may be

overstating the risk of a bust following a housing boom, according to research

by an economist at the national statistics agency.

     The ratio of credit-market debt to disposable income has soared to record

highs around 175% in recent years as households chased million-dollar homes in

Vancouver and Toronto. That measure, published by Statistics Canada with data

back to 1990 and followed by the central bank and in media reports, is often

cited as evidence there is trouble ahead for consumer spending.

     The trouble is that ratio doesn't line up well with a more detailed set of

consumer finance data tracking how often people miss loan payments or resort to

payday loans to make ends meet.

     The Statistics Canada review published June 26 showed a stronger link

between "financial distress" and the ratio of consumer debt to assets. The key

difference is families who might miss a payment could have other easy-to-sell

assets to help keep them in the clear.

     "If you have a lot of assets then it's easy to get additional loans, home

equity lines of credit or what have you, and these things can be used to finance

payments," said George Marshall, who authored the paper. "Some of the assets

that people have are going to be quite liquid. If you've got a portfolio of

stocks or a bond index for instance you can go and sell that and have the money

in your account in a couple of days."

     Policy makers have reacted to the risk of a housing bubble or a consumer

bust by toughening mortgage lending rules and imposing new taxes on speculative

home purchases. While a recent slowdown in runaway Toronto and Vancouver home

prices eased the pressure to do more, the Bank of Canada says households will be

more sensitive to interest rates rising from record lows than past generations

were.

     It's still not clear that assets should completely supplant the income

ratio as a focus, because the findings are based on a newly expanded consumer

finance report using 2016 data, said Marshall. Ruling out the income ratio would

require studying the measures over a longer period of time, and past surveys

lacked the more detailed questions.

     "As debt to income goes up, the measured result is that the financial

distress level, it is a bit higher, it's just not clear whether there is a

signal there or whether it's noise," Marshall said in an interview. "I don't

think that this is a paper that suggests we should throw out the ratio and stop

paying attention."

     Still, the debt-to-asset ratio over the years gives a more assuring picture

of household finances, even after a period where consumer debts grew to become

larger than Canada's gross domestic product.

     The debt-to-asset ratio has tracked between 14% and 19% each year between

1990 and 2018. That's a bastion of stability compared with the income ratio that

climbed from 87% to 100% in the 1990s, then breaking 150% in 2009 and 175% in

2017.

     Marshall's study of the more detailed 2016 data still found areas of

vulnerability in the debt-to-asset figures. Families with higher debt ratios

were more likely to miss a bill payment, and single-parent families were most

likely to use a payday loan. One in 10 families with debt said they had skipped

or delayed a non-mortgage payment in the last 12 months.

     "It matters whether somebody actually has money in the bank that they can

use to pay their debts that is an alternative source other than a recurring

income," Marshall said.

     "Debt to assets should matter," he said. "It just seemed natural to look at

it."

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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