Household debt : between anxiety and panic

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Marie-Pier Roberge

Monday, 4 September 2017 11:19

UPDATE
Monday, 4 September 2017 11:26

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The debt is nothing more than a subject that it comes out of the dust when we no longer know what to say during the holiday season. Worrying about now, all year long. Even if the debt ratio of canadian households has reached a record level of 167,3% last year, Desjardins persists and signs : don’t panic! We have also made the same prescription as last year. Should we really, in spite of the concerns many times repeated on this subject, to stop panic? Let’s examine more closely what motivates this call for calm.

Debt Ratio : alarmist and incomplete ?

In this economic study, we wonder if we should worry about the current state of the debt of quebecers, the debt ratio of these had recently reached a record level.

The answer : not really, since this measure, which divides the total debt (mortgages, personal, credit cards, lines of credit and auto loans) by the net income, would be incomplete because it does not link the rate of interest and omits the averaging over several years of repayment.

Yet, you put it indirectly, always in a relation with the rate of interest by asking whether, in the event of a potential rise in the cost of borrowing, the average debt of canadian households is viable.

It has however, like any medium, a first great limitation : it tells us nothing of the distribution of indebtedness in the population.

In the report, it favors the other two measures to derive a diagnosis. Without prejudice to the exercise, and can even put in a little more light on this as the first measure leave in the dark, it will be seen that they also have their shortcomings, and that the concern that has been sown by the measure criticised remains legitimate.

The debt service

The ratio of debt service indicates to us what proportion of the monthly gross income is monopolized by the payments in interest and principal.

As noted in the study, it allows us to better understand the financial burden of the debt on the people and see what they still have to live after you made these payments.

However, two elements allow for up to criticism.

Using gross income rather than net income, we remove this measurement from the real capacity to pay of households. As we have seen in our publication on the terms of a salary viable, the revenue required for a comparable standard of living vary considerably depending on the composition of the household, as this influences directly the gap that we observe between the gross income and net income. Use the gross income instead of net income does not adequately account for the budgetary effort required for the repayment of the sums due.

Finally, this ratio gives no idea of the life of the financial weight. Will you need to spend 20% of your income to these payments for 25 years or 2 months? Even if the author complains that the leverage ratio to be alarmist, because we did not have to repay the whole with a single income year, it allows you to have an idea of the recurrence of the debt situation and, therefore, the vulnerability to interest rate fluctuations.

The debt-to-asset

What proportion of the assets the debt represents? This measure thus allows us to determine if the assets are sufficient to cover the debts. In the study, it is estimated that in Québec, this ratio is between 0.2 and 0.3, a level that is deemed generally acceptable.

Yet, while we reproach the debt ratio was not put in relation to interest rates, the debt-to-asset performs no better in this chapter.

Let’s not forget the impact of a rise in interest rates : increasing the cost of mortgages, it would potentially demand on the real estate market, and consequently the price. Thus, the debt would remain stable or increase (depending on the presence of a fixed-rate or variable), and the market value of the asset would decrease. This ratio could therefore increase rapidly, especially because, as the report mentions, not least 75.5% of the indebtedness of quebec is a mortgage. And as the same author stated last year, approximately 30% of the loans granted, of all types, are at variable rates.

A legitimate concern

A report published in 2015 by the Bank of Canada recalls that, since the debt is not evenly distributed in the population, the analysis of aggregate data is insufficient.

In the analysis of the debt, we should be able to answer two questions : The debt is it generalized? And what is the intensity of the debt among the people involved?

Unfortunately, none of the statistics criticized or advanced to arrive at their answer. One thing is however certain : the higher the debt ratio increases, the less we are in the shelter of the shocks that would cause an eventual increase in interest rates. And we have recently reached a peak in this chapter.

Then, should we follow the call to the calm launched by Desjardins? There is always room for the perspective of aggregated averages, but keep in mind that for any financial institution such as Desjardins, the debt remains a lucrative business…