...against fictions and other tall tales

Tuesday, 26 April 2011

Study: Indebtedness and family type

Statistics Canada has just released an interesting study dealing with indebtedness according to family characteristics. While I disagree with the study's premise that indebtedness levels were caused by low interest rates and factors such as "the rise of consumerism" (see here), I thought the sections dealing with the debt profiles of lone-parent families and couple families with children were particularly insightful. According to the study, although the average debt to income ratio in Canada currently stands at 148 percent, the ratios for couple families with children and lone-parent families are as high as 170 percent and 227 percent, respectively. Such statistics are rarely mentioned in most discussions on the issue of indebtedness.

Although the study focuses only on Canadian debt metrics, I can't imagine the situation in other countries with similar demographics (i.e. UK, US or Australia) being any different.

3 comments:

  1. Indeed those families look particularly vulnerable to a hike in rates which is probably part of the reason why Mr. Carney was in such a rush to start raising rates, he wanted to warn these people. The debt services ratio has been about stable for the last twenty years while the debt load has, as you have pointed it out, expanded substantially. Should interest rates go up only slightly the effect on households could be devastating. Then add the inflation ramifications of triple digit oil and the average household's budget turns to red.

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  2. I can't disagree with you there, 2plates. Things sure aren't as good as some make them out to be. The recovery is still pretty weak and I don't think it'll get any better soon, especially if governments turn to deficit and debt reduction in the near future.

    I'll only add that, in my opinion, using increases in interest rates to warn people to slow down spending (or to give them advanced notice of future hikes) is an unfortunate way of dealing with the problem. I realize that's the way central bankers normally act, however, the evidence supporting the use of interest rate hikes to incentivize low-income households to reduce spending/borrowing isn't very conclusive. Here's an interesting paper from the CFAP at the University of Cambridge that suggests low-income borrowers are insensitive to interest hikes. Although the paper focuses strickly on credit card borrowing, I tend to view the findings as also applicable to other forms of credit.

    http://www-cfap.jbs.cam.ac.uk/publications/downloads/wp37.pdf

    According to the authors, "individuals who utilize their credit limits fully are
    insensitive to exogenous increases in interest rates as high as 3 percentage points...Subprime credit card borrowers do not tend to decummulate debt in the face
    of increasing borrowing costs. In fact, the higher interest rate leads to higher debt overtime."

    In my view, the only way to address the problem of high indebtedness for low-income individuals is to focus on job creation and ensure positive growth in real wages. I see government spending as playing a central role in fostering investment.

    Again, I'm not disagreeing with you that increases in interest rates wouldn't be a good thing (e.g. they give central banks greater flexibility to reduce rates in the event of another downturn, they help fixed-income folks...), I'm just saying there's something missing when we look only to the central bank when seeking to deal with this problem.

    Also, re your comment on the increase in the price of oil, do you think the effect will be permanent/inflationary or temporary/deflationary (or any other combo)?

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  3. Re oil: I would think inflationary certainly in the short run.

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