- the growth in household net worth as a percentage of income is slowing
- the growth in debt to personal disposable income and household debt to GDP is slowing
- household debt to net worth rises for a second quarter in row after having fallen in mid-2010
The picture is different with respect to the corporate sector, as the total debt to equity of private non-financial corporations continues to fall to record lows.
On a final point, I've been hearing commentators say that the household sector's position isn't so bad given that the household debt service ratio is still at a reasonable level. That, in my view, is a very simplistic way of looking at things. For instance, the chart below (double click to enlarge) shows that Canada's moderate debt service ratio is essentially being sustained by the low interest rates.* If you look at indicators such as total liabilities or the ratio of debt to net worth, you see that the situation isn't as acceptable as some make it out to be.
To be sure, higher levels of household debt may sustain higher levels of household assets. Also, the fact that debt is greater than income isn't a problem unless household income isn't sufficient to cover for debt payments and living expenses. However, the situation could turn ugly if the value of household assets falls, as this would undermine the basis on which the debt was issued. Therefore, in a context in which some economists are predicting a significant decline in home prices (up to 30 percent in some areas) within the next few years, it would be wise for Canada's monetary and fiscal authorities to tread carefully during this period when households are seeking to reduce their level of debt. Rising interest rates or a decline in household income could trigger financial problems moving forward.
* The chart is based on Statistics Canada data and my own calculations. Data in chart is for persons and unincorporated businesses.