Let's Talk About Canadian Debt

Debt has a bad rep. And it should! There are more bad kinds of debt than good, and when as anybody knows, it can get out of hand rather quickly with a couple of big purchases. But let's dig a little deeper into debt as it pertains to the average Canadian household. It is true Canadian debt has reached an all-time high. However, a closer look reveals it's not irresponsible debt.

It's worth nothing that the biggest portion of debt is related to mortgages (two thirds to be more specific), while the remaining third is split between consumer credit (29%) and other loans.

Also, the growth in household debt has been a logical progression from ultra-low interest rates. So it's not super surprising that as the cost of borrowing has dropped, Canadian households have borrowed more.

This is probably as good a time as any to talk about household assets. Yes household debt has grown substantially over the past twenty six years, but families are borrowing to invest in positive assets, like real estate, pensions, financial investments, and businesses. To be more specific, Canadian household assets rose dramatically from $2.2 trillion in 1990 to $12.3 trillion in 2016. Government policy-makers always freak out over household debt (as they should, it's their job), but the job of economists is to look deeper, and what they've found is household net worth is positive and growing over time.

What to take away from all this: debt is a tool. It can be used improperly in relation to household income, but it can be channelled into truly positive places, as we are seeing Canadians doing here. The great risks to management of household debt are a) economic crashes that lead to big-time job losses and b) increase in interest rates that raise debt-servicing costs.

And as of this writing, the Canadian economy remains very strong. The job market is in a good place, dollar has risen to 80 cents, and interest rates remain very low, even with the recent increase. Finally, context is crucial here. Household debt is record high, but so is net worth. Things are good. Just make sure your debt is in the right place!

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