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What We're Reading: National Bank finds ratio of household debt to income is conservative

What We're Reading: National Bank finds ratio of household debt to income is conservative

Date Posted: January 11, 2018

From the report:

"Household debt in Canada is seen by some as unsustainably high and a source of vulnerability for the financial system. But the international evidence suggests that Canadian household leverage and home prices are not abnormal. Drawing on Statistics Canada research to analyse the factors entering into household debt, and on comparisons with other countries, we estimate that given Canada’s fundamentals, the ratio of household debt to disposable income is relatively conservative."

Highlights:

Canadian household debt information often includes the business debts owed by sole proprietors in their personal names: "International comparisons of household indebtedness can be complex. In Canada, the household sector also includes noncorporate businesses. Adjusting the U.S. data in order to conform to the Canadian definition increases the level of debt-to-disposable-income in that country from 104% to 141%."

Canada's stable job market maintains higher home ownership ratios than in other countries: "The relatively high proportion of Canadian households with mortgages is explained by demographics. The prime-age workforce (25- to 54-year-olds — the people most likely to buy homes and use leverage) is enjoying full employment."

Canada attracts newcomers who typically buy homes: "...in absolute terms, more than 170,000 people who became permanent residents of Canada in 2015 were “economic category” admissions — well above the absolute number of economic-category admissions to the U.S., a country 10 times our size, and about equal to the combined intake of the rest of the G7 (Germany, France, Italy, Japan and the U.K.)!"

Universal health care costs must be added back when comparing Canadian household debt to US household debt: "Americans pay less tax than Canadians but today must devote about 20% of disposable income to health spending, a non-discretionary expense. In Canada, the share of income going to health care not covered by public insurance is about 4%. When we correct disposable income for this factor, household leverage in the U.S. turns out to be higher than in Canada, not lower."

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