Debt picture not so bleak: BMO

The cacophony of concern over rising Canadian debt levels is overshadowing other encouraging personal finance data, a prominent economist says.

The cacophony of concern over rising Canadian debt levels is overshadowing other encouraging personal finance data, a prominent economist says.

Statistics Canada released data Monday showing that Canadian household debt has risen to 148 per cent of disposable income. The eye-popping figure is all the more alarming considering it's the first time since the 1990s that Canada's ratio has been higher than that of the U.S.

Alarm bells rang everywhere from the Bank of Canada to the Finance Department on Monday, and Canadians were urged to tighten their belts and prepare for a time of austerity.

But a closer look at the numbers indicates the picture might not be so bleak.

"The continued laser-like focus on debt overshadows the other half of the balance sheet," BMO chief economist Doug Porter said Monday.

Namely, Canadians are borrowing. But they're also saving, and they're worth more than they used to be.

The savings rate has averaged four per cent over the past year and is now below the U.S rate of 5.8 per cent. But Canada's rate is now more than double the level it was at during its all-time low in 2005.

And as Porter notes, Statistics Canada's rate of personal savings as a percentage of disposable income doesn't give the full picture of how much Canadians are actually saving.

The current rate narrowly looks at how much households are saving from current income but ignores unrealized capital gains as well as returns in tax-sheltered vehicles like RRSPs and tax-free savings accounts, Porter said.

A better measure might be to track the change in household financial assets as a share of income. It's much more volatile (prone to 50 per cent swings in both directions within the same year), but for the last five years, it has hovered at roughly double the published savings rate. And it's never gone below the conventional "savings rate" in the last 15 years.

Increasing assets

A closer inspection of the numbers Statistics Canada released Monday shows more reason for optimism.

Yes, the debt-to-income level has gone from around 100 per cent in 1990 to almost 150 per cent today (the orange line on the chart above). But assets — the green line (showing net worth as a percentage of income) — have gone up too: from 417 per cent to 610 per cent over that same period.

In layman's terms, "assets are again growing faster than debt in absolute terms," says Porter.

That suggests that the assets Canadians are buying are padding their net worth more than enough to offset the debt load they take on to buy some of them. And debt as a percentage of net worth (the blue line on the chart above) has remained relatively flat.

"While debt has risen to record heights, so, too, have financial assets due to a rebound in equities and an underlying rise in savings," Porter said.

The sum total of all stocks, bonds, cash, GICs, life insurance and pension assets, minus household debt, is a fairer picture of real savings, Porter says. That figure has recovered from recessionary lows to $2.7 trillion so far this year — which works out to $80,000 per Canadian, or 167 per cent of per capita GDP.

"Taking these factors into account … leads to the conclusion that household finances are not nearly as weakened as the dire headlines would suggest," said Porter.