Canadian Household Debt - continued

Among all news articles, research and recent speeches of Carney on the issue of Canadian's household debt issue, I found this recent article from CIBC's Avery Shenfeld provides much more indepth perspectives and go beyond the headline number.

Most articles focused on the debt / disposable income %, which currently stands at 145%, a level at par with our counterpart in US.

The most important point Shenfeld made is the distribution of the debt matters.

1. Safe mortgage: For example, the ballooning sub-prime mortgage market that was set up for a run of defaults in US does not seem to exist in Canada. In Canada’s mortgage market, the build-up in debt among those 35 years and over has been concentrated among those with incomes above $50,000 per year.

2. More Prudent Non-mortgage credit: also appears to have been allocated to safer hands in Canada than what we saw in the lead-up to America’s crisis. New credit cards in Canada continue to be issued to consumers with high credit scores, this in stark contrast to conditions in the US prior to the 2008-2009 crisis where a much higher share went to those with low ratings

3. Stronger median incomes: Given that wider gap of the super rich and the rest of population in US vs. Canada, simply looking at the average debt / deposable income of the whole nation might be mis-leading, as the super rich certainly added to the denominator inapproportionally but not to the numerator. Shenfeld considers median income is a more usefule metrics. Labour income growth in Canada has been much more solid than US, and as a result, Canadian median incomes have also seen greater gains than in the US, helping to support domestic household credit performance.

The bottom line is the current pace of debt growth is unsustainable if income growth doesn't catch up. But on the other hand, Canada isn't in the hot water yet.

As for solution, Shenfeld doesn't think sharp debt reduction nor significant rate hikes will be prudent either as that will jeapodize the already weak economy and further damage the export competitiveness. Perhaps as he suggested at the end of the article, the cooling effect of the housing market and declining consumer spending sentiment will gradually reduce the numerator of the equation.