neither a borrower nor a lender be

'Neither a borrower nor a lender be," suggested old Polonius to Laertes in Hamlet. Always good advice, especially when your son is headed to the fleshpots of Paris for a prolonged and unsupervised visit.

‘Neither a borrower nor a lender be,” suggested old Polonius to Laertes in Hamlet. Always good advice, especially when your son is headed to the fleshpots of Paris for a prolonged and unsupervised visit.

The Bank of Canada has recently been trying to make the same point, although it doesn’t sound quite as good in central-bankerese: “Without a significant change in behaviour, the proportion of households that would be susceptible to serious financial stress from an adverse shock will continue to grow,” is how the bank’s governor Mark Carney phrased it.

That was just before we all went on our annual Christmas spending spree. Canadians listened to Mark Carney as much as Laertes did to his old man.

But Carney has a point. As recently as 1990, household debt was 90 per cent of disposable income.

The most recent figure is around 150 per cent, a historic high for Canada. We are now even more leveraged than those crazy Americans. And it is trending higher. Carney says household credit has grown 7 per cent since the trough of the recession. Incomes certainly haven’t grown that fast.

The growth in credit in recent decades has been fuelled by an amazing convergence of factors. The Bank of Canada has managed to keep inflation low since the 1990s, which led to lower interest rates and made debt more affordable. The sustained economic growth since NAFTA has led Canadians to worry less about losing their jobs, so they were comfortable with more debt. More women are working, which means a two-person household can carry more debt and be less worried about a sole bread-winner losing a job. The financial industry and the government have also helped, with the former offering more innovative credit cards and home equity lines of credit, and the latter offering mortgage insurance on more and more aggressive terms.

Even after the government rather sheepishly dialled back Canadian mortgage rules after watching the mayhem south of the border, the federal taxpayer will still guarantee a mortgage with a five per cent down payment (tiny by historical standards) and a 30-year amortization.

Why is all this debt a problem?

After all, Canadians are freely making choices to borrow. And there is no magic number for the debt-to-disposable-income metric. Having a 200 per cent figure might be fine, if you had a hefty stock portfolio or a rapidly appreciating house. And according to economists at one of the big banks, household assets have been rising most years since 1990. Except notably in the last few years, when household debt finally surpassed the book value of household assets.

Despite these arguments, there are two reasons to be worried.

The first is that more and more households are vulnerable to economic shocks. If you are a renter and the market crashes, who cares? But say you put down $10,000 to buy a $200,000 house. And then the market takes back the 20 per cent it went up in the year before you bought it. You’ll find yourself with negative equity of $30,000. It might take you years just to get your head above water. Same principle applies if you have an RSP and a mortgage when the stock market tumbles but your mortgage stays the same.

And remember that interest rates are now at extremely low levels.

If they go up, large numbers of Canadians will feel the squeeze.

Some economists estimate that in early 2010 about 6.5 per cent of Canadian households were already feeling debt distress; that is, over 40 per cent of their monthly incomes went on debt payments. Critically, another 9.3 per cent of households are in the 30-40 per cent range.

They would get hit hard if rates went up.

Those percentages might not seem like a big deal, but it means two million Canadian households. If that many families end up under severe debt pressure, that means trouble for the whole economy.

The second reason is that this distress is not evenly spread. The bulk of borrowing in absolute terms is by rich people for big houses. But the debt burden, as a percentage of income, is highest on low-income Canadians. Low-income Canadians had a debt-to-disposable-income ratio of around 180 per cent last year.

This could mean real hardship on a large scale. Especially if something unexpected happens (which it often does).

The government is doing the right thing by limiting its mortgage guarantees, although it would be nice to hear someone taking responsibility for the idea of 40-year amortizations and zero per cent down payments a few years ago.

But the government has also created an ugly dilemma for itself.

If it lets the housing market continue to boom, the debt problem will be even worse when it finally blows. If it deflates it too aggressively, the housing assets of millions of Canadians will fall in value and worsen their debt ratios.

But in the bigger picture, the government can’t really protect us from ourselves.

If you really want to borrow foolishly, you can. Yukonomist has received a number of preapproved offers lately for amounts that suggest that Canadian financial institutions have a wildly overblown understanding of how lucrative it is to write economics columns.

As for each of us personally, it would make sense to listen a bit more carefully to Polonius.

Unfortunately, Hamlet stabs him in Act III before he can give Laertes any advice in iambic pentameter on home equity lines of credit and 30-year amortizations.

So we’ll have to make do with Mark Carney and his turgid advice on how to avoid debt drama.

Keith Halliday is a Yukon economist and author of the Aurore of the Yukon series of historical children’s adventure novels.

Get local stories you won't find anywhere else right to your inbox.
Sign up here

Just Posted

Maria Metzen off the start line of the Yukon Dog Mushers Association’s sled dog race on Jan. 9. (Gabrielle Plonka/Yukon News)
Mushers race in preparation for FirstMate Babe Southwick

The annual race is set for Feb. 12 and 13.

The Yukon government is making changes to the medical travel system, including doubling the per diem and making destinations for medical services more flexible. (Joel Krahn/Yukon News file)
Subsidy for medical travel doubled with more supports coming

The change was recommended in the Putting People First report endorsed by the government

Chloe Sergerie, who was fined $500 under the <em>Civil Emergency Measures Act</em> on Jan. 12, says she made the safest choice available to her when she entered the territory. (Mike Thomas/Yukon News file)
Woman fined $500 under CEMA says she made ‘safest decision’ available

Filling out a declaration at the airport was contrary to self-isolation, says accused

The Yukon Department of Education building in Whitehorse on Dec. 22, 2020. Advocates are calling on the Department of Education to reverse their redefinition of Individualized Education Plans (IEPs) that led to 138 students losing the program this year. (John Hopkins-Hill/Yukon News file)
Advocates call redefinition of IEPs “hugely concerning,” call for reversal

At least 138 students were moved off the learning plans this year

Yukonomist Keith Halliday
Yukonomist: Your Northern regulatory adventure awaits!

“Your Northern adventure awaits!” blared the headline on a recent YESAB assessment… Continue reading

Yukoner Shirley Chua-Tan is taking on the role of vice-chair of the social inclusion working group with the Canadian Academy of Health Sciences’ oversight panel and working groups for the autism assessment. (Submitted)
Canadian Academy of Health Sciences names Yukoner to panel

Shirley Chua-Tan is well-known for a number of roles she plays in… Continue reading

The Fish Lake area viewed from the top of Haeckel Hill on Sept. 11, 2018. The Yukon government and Kwanlin Dün First Nation (KDFN) announced they are in the beginning stages of a local area planning process for the area. (Crystal Schick/Yukon News file)
Local area planning for Fish Lake announced

The Government of Yukon and Kwanlin Dün First Nation (KDFN) announced in… Continue reading

Whitehorse City Hall. (Joel Krahn/Yukon News file)
City hall, briefly

A look at decisions made by Whitehorse city council this week

Fire damage, photographed on Jan. 11, to a downtown apartment building which occurred late in the evening on Jan. 8. Zander Firth, 20, from Inuvik, was charged with the arson and is facing several other charges following his Jan. 12 court appearance. (Gabrielle Plonka/Yukon News)
More charges for arson suspect

The Inuvik man charged in relation to the fire at Ryder Apartments… Continue reading

The grace period for the new Yukon lobbyist registry has come to an end and those who seek to influence politicians will now need to report their efforts to a public database. (Mike Thomas/Yukon News file)
Grace period for new lobbyist registry ends

So far nine lobbyists have registered their activities with politicians in the territory

The Government of Yukon Main Administration Building in Whitehorse on Aug. 21, 2020. Some Yukon tourism and culture non-profit organizations may be eligible to receive up to $20,000 to help recover from losses due to the COVID-19 pandemic. (Crystal Schick/Yukon News file)
Details released on relief funding for tourism and culture non-profits

Some Yukon tourism and culture non-profit organizations may be eligible to receive… Continue reading

Most Read