The ‘conservative’ Canadian consumer has been often cited as one of the primary reasons for Canada’s miraculous escape from the depths of the Great Recession. In fact, earlier this week, the deputy governor of the Bank of Canada attributed our ability to largely side step the worst of the recession to our, “relatively strong household balance sheets“.
This has never quite sat well with me. I’ve long believed that Canada is in the midst of a fairly significant credit bubble, fueled largely by a massive expansion in mortgage credit and HELOCs. I’ve written about Canada’s credit bubble before, but now I’d like to revisit it.
Let’s start by noting that mortgage debt as a percentage of GDP is currently sitting at approximately 63%.
While well above its long-term average, it is certainly well below the peak the US experienced (~73% of GDP) and it is a country mile from the ridiculous levels of mortgage debt relative to GDP those crazy Aussies are carrying (nearly 90%). Thanks to Steve Keen for this chart.
However, mortgage debt alone is but one part of the puzzle. Indeed the total debt burden including other consumer debt is significant in this discussion. First, let’s look at the US experience with total consumer debt as a percentage of GDP. Thanks to Calculated Risk for this gem.
Notice that once other consumer debt is factored in, we see that the US consumer credit bubble peaked at slightly less than 95% of GDP with mortgage debt comprising roughly 77% of total consumer debt burden.
Now let’s turn our eyes to Canada. For those who want to replicate this data, look at CANSIM tables 176-0027 and 176-0069 and well as Stats Canada for historic GDP data. Here it is:
Note that when other consumer debt is added to mortgage debt, we are currently sitting at ~93% GDP with only 68% of that debt total being mortgage debt (compared to 77% in the US). This is why discussions of Canada’s mortgage debt alone are not sufficient to fully appreciate the full scope of our made-in-Canada debt bubble. Note also that the CANSIM data does not include debt issued by car dealerships or department stores. So much for the conservative Canadian consumer story!
If we look at cumulative growth in total consumer debt relative to GDP and inflation we find the following:
Indeed we know that the HELOC is the fastest growing form of debt, now accounting for 12% of all consumer debt outstanding. Canadians have a love affair with home equity. The wealth effect spending associated with our strong and bubblicious housing market is by far the most significant factor that has helped Canada side step (or is that ‘delay’) the most significant effects of the credit crisis that gripped much of the world.
For more on Canada’s consumer debt levels, check out these related posts: