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Wednesday, July 27th, 2016

YOUNGER CANADIANS PUT BRAKES ON DEBT IN 2012, OLDER KEEP BORROWING

YOUNGER CANADIANS PUT BRAKES ON DEBT IN 2012, OLDER KEEP BORROWING

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Highlights

•  In 2012, Canadian household debt grew at its slowest pace since 2003 and the upward trend in the  household debt-to-income ratio ebbed. Ipsos Reid survey data suggests that there was diverging  borrowing behaviour across age groups and by region in 2012. 

•  At the national level, the moderation in household debt in 2012 was broad based across most age  groups, with the exception of those 65 years and older. Debt among the 65 plus age group increased  15% in 2012. 

•  Households in the majority of provinces practiced more debt restraint in 2012. Ontario is one province  where households appear to be making a particular effort to reduce debt, whereas indebtedness  in Alberta continued to grow rapidly across all age groups, likely reflecting firm labour and housing  market conditions.  

•  At the regional level, the run-up in debt and the average borrowing level for those 65 years and older was highest in Ontario, Alberta and Québec in 2012. 

•  The Ipsos Reid data reveals that the slowdown in debt growth is occurring most notably among  age groups and provinces with relatively high levels of indebtedness. The slowing in debt growth is  encouraging, however, there is a concern that Canadians are entering retirement more financially vulnerable than they have in the past.  

One of the biggest domestic news stories of the past year was the moderation in the rate of household  borrowing. In 2012, personal debt grew by its slowest pace since 2003 and the upward trend in the household debt-to-income ratio ebbed. In this report, we leverage survey data from Ipsos Reid to shed light on which segments of  the population, both by age and province, have been leading the moderation in debt and which have been lagging. 

We note that using survey data has its limitations, such as sample bias and the quality of the data being highly dependent  on the accuracy of the responses. Another limitation is that given  small sample size, Atlantic provinces have been aggregated, as have the statistics for Manitoba and Saskatchewan. However, 

Ipsos Reid’s Canadian Financial Monitor provides the most detailed and timely regional household fi nancial snapshot, surveying  roughly 12,000 households across Canada in a given year. The  survey is highly reputable and often used by the Bank of Canada in its analysis of household balance sheets. 

Readers should also note that there are differences between debt and income measures provided by the Ipsos Reid survey compared to other age groups. However, the updated fi gures  add credence to the recent theme that Canadians are entering retirement more indebted than ever.

Other age groups have scaled back their rate of borrowing, or have reduced debt outright. In particular, those aged 45 to 64 years paid down all types of debt for the fi rst time since the survey began in 2002. Meanwhile, debt growth slowed for those 25 to 44 years of age. Canadians in this age group continued to take on some additional mortgage credit, but drew down other forms of debt, such as credit cards and personal lines of credit. 

Regional divides also exist  

Table 1 shows that while households across Canada practiced more restraint in 2012, there were some diverging and the most commonly cited Statistics Canada data (see chart 2) due to methodological differences. For instance,  Ipsos Reid provides us with pre-tax income data, while  Statistics Canada uses disposable income to calculate their debt-to-income ratio, which subtracts both taxes and debt  payments from incomes. In addition, the Ipsos Reid data  presented in this report represents the average value for  those who hold debt, whereas Statistics Canada’s aggregate measures include both households who are indebted  and those that are debt free. Despite these differences, the survey does broadly follow the trends observable in Statistic Canada’s debt measures. Overall, the survey suggests diverging borrowing behaviour across age groups and by region in 2012.

Older Canadians continue to rack up debt 

As Chart 3 shows, at the national level, the moderation in household debt growth in 2012 was broad based across most age groups, with the exception of those 65 years and older. On average, households in the 65 plus  age group bucked the national trend, accumulating almost  $6,000 in new debt, or equivalent to a 15% increase. The survey data suggest that the increase in debt was mostly  used to fund consumer spending, either on discretionary  items (out of want) or nondiscretionary items (out of  need). Meanwhile, the assets of those 65 years and older  (including real estate) grew little in the year, pointing to  a further deterioration in their fi nancial position in 2012  (see Table 1 at end of the report). Canadians 65 years  and older continue to have the lowest level of debt, both  in absolute terms and relative to their incomes, when trends by province. Household credit contracted the most in Ontario and British Columbia in 2012, two provinces with some of the highest levels of household indebtedness. 

Households in these provinces scaled back their borrowing of all types of credit in the year. Ontario is one province where households appear to be making a particular effort to reduce debt, as this is the second consecutive annual decline in credit outstanding. 

Meanwhile, debt continued to grow in provinces with the lowest debt-to-income ratios, like Québec, Manitoba and Saskatchewan. While debt also contracted in the Atlantic Provinces, the decline followed a sharp double-digit gain in 2011. The increased indebtedness in the above three regions has been fuelled by mortgage credit, mostly as the younger population has been investing in real estate. Meanwhile, Alberta is one province where debt continued to grow aster than income in 2012, as households added $16,000 in mortgage balances to their stock of debt. The increase in mortgage debt can be attributed to relatively robust home sales in Alberta in 2012. 

The age picture also changes by province. The run-up in debt and the average borrowing level for those 65 years and older was highest in Ontario, Alberta and Québec in 2012 (see chart 6). In contrast, seniors in the Atlantic region and Manitoba and Saskatchewan cut back their debt. The moderation in debt growth across other age groups was consistent among provinces, with the exception of Alberta. 

Those between the ages of 25 to 44 years old in Alberta added roughly $26,000 worth of mortgage debt to their balance sheets in 2012, contributing to a 13% gain in overallhousehold debt for this age group. Coincidently, those aged 25 to 44 years in Alberta have the highest debt-to-income ratio across Canada and the age groups. 

Bottom Line

There is no denying that the level of household debt in Canada is excessive and leaves Canadians more vulnerable to the risk of a future rise in the unemployment rate or interest rates. Nonetheless, while the Canadian household debt-to-income ratio continues to rise, the underlying trend of slowing debt growth is positive. The Ipsos Reid data reveals that the moderation in debt growth is occurring most notably among age groups and provinces with the highest levels of indebtedness. More importantly, households are reigning in their borrowing of non-mortgage credit (credit cards and personal lines of credit), which is debt that tends to be more expensive and risky. Highly indebted younger Canadians appear to heeding the Bank of Canada’s warnings of taking on too much debt. And, tighter mortgage insurance rules and lending regulations have certainly done their part in curbing borrowing. The exception to the story are those 65 years and older in Ontario, Quebec and Alberta. Older Canadians, on average, still hold relatively little debt and many have signifi cant assets to fall back on. Debt growth among older Canadians, however, is a concern because it still raises questions as to whether higher debt burdens will affect their standard of living in retirement. However, we would need to look at the rising debt burdens among older Canadians on a case-to-case basis to understand how both the debt and assets are evolving for individuals in this age group in order to assess the future risks.

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