The Canadian Household

The headlines tend to be a bit scary when they show  the upward sloping Canadian Household Debt to Income charts:

(you will have to click on this chart)

• What the media (and others) tend to focus on is the orange line that shows that debt levels vs. disposable income are at record levels.
• However, that is only part of the story:
• The blue line represents the debt service ratio which is interest payments vs. incomes, which is declining (as the costs of borrowing have declined) and at record lows.
• In other words, households can still afford the current debt levels.

Digging deeper into March 12th's Stats Can. release:

(more here: http://www.statcan.gc.ca/daily-quotidien/150312/dq150312a-eng.htm)

• 2014 was a strong year for asset growth for Canadians as average net worth rose by 7.5%.
• Financial Liabilities only grew by 4.6%.
• Ultimately that means that Canadians are borrowing intelligently and using debt to build their assets.
• Financial assets grew by 9.5%.
• Non-financial (mostly real estate) assets grew by 6%.
• Interestingly: looks like Canadians are better off investing in their portfolios rather than houses.

More interestingly:

(click on this chart to see it better)

•  Canadian Debt to Net Worth has been declining since 2008 (orange line), which means that Canadians have been building their net worth at a quicker pace than they have been increasing their levels of debt. This is a good thing!!

• Although they built Financial assets (as a % of Net Worth, blue line) faster in the 1990's, the "Nortel Effect" and 2008 have been left in the past and investors have returned to building their portfolios more than their real estate holdings.

While this makes good financial sense at the moment, Canadians are vulnerable to both higher interest rates and declining assets prices because they have greater amounts of leverage.

Another reason not to be complacent.

The views expressed are those of the author, Scott Tomenson, a Raymond James Financial Advisor, and not necessarily those of Raymond James Ltd. It is provided as a general source of information only and should not be considered to be personal investment advice or a solicitation to buy or sell securities. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor's circumstances and risk tolerance before making any investment decision. The information contained in this blog was obtained from sources believed to be reliable, however, we cannot represent that it is accurate or complete. Raymond James Ltd. is a member of the Canadian Investor Protection Fund.