Household Balance Sheets and the Outlook for Consumption
With Canadians working, but not as much as they would like, they have been borrowing. Real household credit expanded rapidly throughout the recession, in contrast to previous downturns, and has continued to grow through the recovery. Canadian households have now collectively run a net financial deficit for 37 consecutive quarters. That is, their investment in housing has outstripped their total savings for over nine straight years. In effect, households are demanding funds from the rest of the economy, rather than providing them, as had been the case through the 1960s, 1970s, 1980s and 1990s.
This cannot continue. The ratio of Canadian household debt to disposable income reached 146 per cent in the first quarter of this year, an all-time high and very close to the current level in the United States . In a series of analyses over the past year the Bank has found that Canadian households are increasingly vulnerable to an adverse shock and that this vulnerability is rising more quickly than had been previously anticipated.
It is true that the strength of housing and other assets has meant that the net worth of Canadians remains about six times their average disposable income compared with slightly below five times in the United States. However, while asset prices can rise or fall, debt endures. Despite the buoyancy of the housing market, the debt-to-asset ratio has risen to its highest level in more than 20 years.
In short, Canadian household balance sheets are becoming increasingly stretched. It is possible that Canadians are beginning to address some of these vulnerabilities. This would be consistent with recent data that indicate a slowdown in household consumption expenditures and housing activity, amid a labour market recovery that has been longer on jobs than on hours or incomes.