Canadian household debt hits record high as consumer spending rises

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There is a good reason why party leaders haven't devoted much time in this federal election to focusing on rising household debt levels: Consumer spending has been a rare bright spot in an economy that has otherwise been in the doldrums.

Canadian household debt hit a new record last month as consumer spending jumped 2.3 per cent in the second quarter of the year, even as the economy slipped into what's been termed a "technical recession."

In the past, policy-makers have warned about the larger economic risks that come from Canadians' growing love affair with debt. But during this election, party leaders have instead focused on ways to help consumers spend even more: Both the Conservatives and Liberals have supported allowing Canadians to cash in more of their RRSPs to finance home purchases.

No party has opposed the Conservatives' plan to reintroduce a home renovation tax credit and the Liberals' proposed middle-class tax cut is partly aimed at easing the burden on indebted consumers.

Since the start of the year, consumers have been drawing down their savings to buy houses, cars, furniture and clothing. Credit-card spending rose by 8 per cent this year, with spending on restaurants and fast food up more than 12 per cent, according to a study by payment processor Moneris Solutions Corp. Auto loans rose nearly 4 per cent in the second quarter on the back of record vehicle sales, credit rating agency Equifax found. But much of the strength has been driven by the resilient housing market, which has convinced buyers and homeowners to pour money into their homes.

Home improvement spending soared nearly 10 per cent in the second quarter of the year compared with the same time last year, led by sales of glass, paint, wallpaper and flooring, Moneris found. Furniture sales are up more than 17 per cent. Half of all consumer spending now comes from Ontario and B.C., two markets that have led the way for home prices and where Toronto-Dominion Bank economic analyst Admir Kolaj notes retail sales have also had the best start to the year in the past decade.

Some of that boost in spending power is likely to be short-lived, driven by lower gas prices, which fell nearly 20 per cent in the first half of the year, along with cuts to interest rates this year. But with employment levels stable in most parts of the country, savings rates keeping pace with long-term trends and household assets soaring on the backs of higher home values, there is plenty of evidence that Canadian consumers are actually in their best shape ever.

"Ultimately, consumers are driven by their own circumstances," said Bank of Montreal chief economist Douglas Porter. "If they are gainfully employed, if they're getting even modest real wage gains, if they're faced with extremely low borrowing costs, they will respond to those factors."

The rosy picture of the household balance sheet has a dark side, however. Strength in places like Ontario and B.C. has been offset somewhat by a slide in consumer spending and housing sales in Alberta and Saskatchewan, where consumer sentiment has fallen to its lowest level since 2008, according to the Bloomberg Nanos Confidence Index. "Saskatchewan and Alberta have gone from the runaway growth leaders to being the laggards on retail sales in a very short period of time," Mr. Porter said. "It's almost been like they've gone from 120 kilometres an hour to zero in 60 seconds."

At the same time, all that spending hasn't been matched by growth in incomes, helping push the household debt to income ratio up to a record high of nearly 165 per cent. Roughly 80 per cent of Canadians are in debt, a Bank of Montreal report last month found, and nearly two-thirds would have trouble affording their debts if interest rates went up by just two percentage points. Higher debt loads also mean that consumers now spend more on debt than ever before. Canadians now spend an average 14 per cent of after-tax income on their debts, up from 11 per cent in 1990, even though interest rates have plunged from 14 per cent back then to below 1 per cent today.

Not all of that debt has come solely from mortgages. Credit card balances held by chartered banks have risen nearly 6 per cent over the past two years to $78-billion, ratings agency DBRS Ltd. said last week, noting that even as federal leaders have focused over the past several years on policies aimed at cooling the housing market, other types of consumer debt have continued to balloon.

Even more troubling is that the group that appears to be struggling the most with debt is seniors. For the first time in five years, 90-day delinquency rates rose among seniors in the second quarter, Equifax found, even as they fell among other age groups.

But consumers are unlikely to be able to power the economy for much longer, with many economists predicting further job losses in the resource sector and higher prices for imported goods on the heels of a depreciating loonie.

"I think [consumers] feel a little bit tired," said Moody's Analytics chief economist Mark Zandi. "There has been a lot of debt accumulation and leverage. I don't think Canadian consumers can lead the way for the economy."

Eventually, many say, the party that forms the next government will need to find a way to grow the economy by boosting exports, hiking government infrastructure spending or spurring capital investment from businesses in order to give consumers some much-needed breathing room.