Is Canada on the Brink of a Credit Crisis?

Canada Flagged for a Recession

Is there a credit crisis brewing in the Canadian economy? Canada may have avoided the same kind of financial crisis that the U.S faced back in 2008 and 2009, but there are signs that it is now on the brink of a financial crisis. In fact, Canada has been flagged for vulnerabilities tied to property prices, credit, and the eventuality of rising interest rates. Canada may be on the brink of a recession, one that could be even bigger than the one that paralyzed the U.S. 10 years ago. First, there’s a huge housing bubble in Canada. By one measure, the household debt to disposable income ratio, the Canadian housing bubble is bigger than the one in the U.S. that burst 10 years ago and helped trigger the Great Recession. Canadians have taken on record amounts of debt, fuelled by artificially low interest rates and soaring housing prices. In the fourth quarter of 2016, the amount of household credit market debt climbed to 167.3%, up from 166.8% in the third quarter. What that means is, for every dollar of disposable income, Canadians owe a record $1.67.¹ This record debt is seen as a key risk to the Canadian economy. Artificially low interest rates have made it cheap for Canadians to borrow money. At the end of 2016, total household debt, which includes consumer credit, mortgages, and non-mortgage loans, totalled nearly $2.03 trillion. Mortgage debt accounted for most of the total at 65.5%. Because of Canada’s easy monetary policies, the country’s real estate market has been red hot. In March 2017, the national average price for homes sold advanced 8.2% year over year to $548,517. Toronto and the Greater Toronto Area are behind most of that growth. In March, housing prices in the Toronto area were up 28.5% at $899,452.² Canadians are taking on more and more debt, and the housing bubble is getting bigger and bigger. Historically, large debt loads like this are almost always followed by a proportional recession. Speaking of which, the only thing keeping the Canadian economy out of a recession right now is the housing market. According to the most recent data, real estate-related industries were three of the top five gross domestic product drivers in February.³ Had these industries not experienced growth, Canadian growth domestic product (GDP) would have retreated. Thanks to the strong real estate market, housing is expected to be an even larger part of GDP in March. If the country slips into a recession and the housing bubble pops, Canadians are going to be in a lot of trouble. That’s because 71.6% of that $2.03 trillion of consumer debt is in mortgages. If the bubble bursts, a lot of Canadian homeowners will be responsible for mortgages that are worth more than their homes. Canadian household finances will be stretched even further when interest rates start to inch higher. Where Canadian homeowners could tap the equity they once built up in their homes to keep them afloat, they will not be able to do this when prices tumble. Canadian banks, in an effort to avoid defaults, will stop lending or increase the cost to borrow. This does not bode well for the Canadian economy in 2018.

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1. “Latest Statistics,” Statistics Canada, May 8, 2017; http://www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/media01-eng.htm.
2. “GTA Realtors Release Resale Housing Market Figures,” Toronto Real Estate Board, April 5, 2017; http://www.trebhome.com/market_news/release_market_updates/news2017/nr_market_watch_0317.htm.
3. “Gross domestic product by industry, February 2017,” Statistics Canada, April 28, 2017; http://www.statcan.gc.ca/daily-quotidien/170428/dq170428a-eng.htm.