Rising debt loads increase risk of housing bubble

The hot housing market is a bubble that’s about to pop. Household debt keeps hitting record levels that will eventually come back to bite consumers. Neither prediction has come true yet, but that doesn’t mean one or both won’t happen.

In fact, the two are linked. Rising housing prices mean higher debt for those who buy, while others are using equity in their homes to augment borrowing. Neither is a good thing in a time when incomes are stagnating.

The Bank for International Settlements is the latest organization to issue a warning about debt levels here, noting Canada has one of the highest credit-to-GDP ratios in the developed world, a situation that threatens households and, ultimately, the banking system alike.

In its latest quarterly report, BIS joins a long list of economists – domestic and international – sounding warning bells about household debt levels. There is cause for concern, as Statistics Canada reports the ratio of household credit market debt to disposable income rose to 167.6 per cent in the second quarter of the year, up from 165.2 just three months prior.

Tackling our debt seems like a good idea. Unfortunately, debt has been fuelling our economy – two-thirds of it based on consumer spending.

Easy credit and low interest rates have fuelled the borrowing, with total consumer debt rising by two per cent in the second quarter, for a total of $1.97 trillion. Of this, $1.29 trillion was in mortgages, and $585.8 billion was in consumer credit, car loans and other personal loans.

Low borrowing costs have made it easier for consumers to service their debts. What happens if rates start to rise, however?

It’s our spending habits that have got the better of us: bigger homes, new cars, electronic toys and so on. Our wants are limitless, while ability to pay for them is not.

Worse still, our real incomes and net worth are in decline, meaning we’re borrowing just to maintain the status quo. So, even as household debt climbed relative to our incomes, we had less than we did last year. Although residential real-estate assets increased, this was more than offset by the decline in the value of our investment in stocks (including mutual funds) and our pensions.

Caught between falling incomes and growing household debt, we’re using borrowed money to finance day-to-day expenses rather than consumer goodies. Canadians reaching their debt ceilings is perhaps one of the factors in the growing number of forecasts predicting lower growth in the domestic economy.

Clearly debt is a problem at the individual level, just as it is with governments. The key to changing the situation rests not only with cuts and austerity – we should, however, be saving for the future – but with seeing actual economic growth that moves us away from a dependence on consumerism as its fuel.

Polls show we’re concerned about debt – paying it down has become an increasingly important priority for those nearing retirement age, for instance – but there’s still far more talk than action. If the bubble goes pop – well, when it does, as there’s a simple reality: housing prices do not always go up – the recriminations will be as abundant as the cases of 20/20 hindsight.


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