The surge in Canadian borrowing over the last five years has been driven by the country’s most indebted households, finds a new research report from CIBC World Markets Inc.
The report notes that while much concern has been raised about the record level of Canadian household debt, now at a debt-to-income ratio of 151%, little analysis had been done to determine the distribution of the debt and what is driving its growth.
The CIBC research found that Canada’s debt-to-income ratio is topped by only seven other developed economies. Within Canada, the research found that households heavily reliant on borrowing, those with a greater than 1.6 debt-to-gross income ratio, now hold 73% of all household debt in Canada.
“Our new analysis found that all of the rise in debt since 2007 has been driven by borrowing from those with a high debt-to-gross income ratio,” says Avery Shenfeld, chief economist at CIBC, who co-authored the report with Benjamin Tal, deputy chief economist.
“Some 34% of households that have debt are now in the high-debt-burden category and they account for nearly three-quarters of household debt outstanding.”
Shenfeld says that, not surprisingly, the share of those with high debt-to-income ratios is greater in the provinces of B.C., Alberta and Ontario where housing is the most expensive. What he found more surprising was the growth in Canadians over the age of 45 who hold a high-debt-burden. The share of heavy borrowers in this age group has climbed from 36% in 2007 to 44% in 2011.
“A rising share of the highly indebted are over 45 years old, an age where accumulating net assets ahead of retirement should be paramount. Canadians nearing retirement who should be in their prime savings years are, instead, getting themselves deeper into debt. We are already seeing an uptrend in bankruptcies for those 50 and over, but the more material impact will be that this group’s ability to spend could be severely squeezed upon retirement.”
The report also examined the differences between the spending habits of heavy and non-heavy borrowers. Controlling for family composition and age, the research found that households with lower debt-to-income ratios appear to devote the lower costs they face on debt service to savings, rather than consumption.
The result is that high-debt-load Canadians are also being hurt relative to other families in terms of their accumulation of assets. While their debts have grown by 18% since 2007, high debt-to-income Canadians have seen their assets accumulate by less than four per cent over the same period. This compares to a roughly 10% growth in assets for those with more moderate debt-to-income burdens.
The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/eijan12.pdf