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

Dawson City RCMP are reporting a break and enter on Feb. 25 after two masked men entered a residence, assaulted a man inside with a weapon and departed. (Black Press file)
Two men arrested after Dawson City home invasion

Dawson City RCMP are reporting a break and enter on Feb. 25.… Continue reading

Highways and Public Works Minister Richard Mostyn speaks to reporters at a news conference in Whitehorse on Dec. 21, 2017. New ATIPP laws are coming into effect April 1. (Chris Windeyer/Yukon News file)
New access to information laws will take effect April 1

“Our government remains committed to government openness and accountability.”

City council meeting in Whitehorse on Feb. 8. At Whitehorse city council’s March 1 meeting, members were presented with a bylaw that would repeal 10 bylaws deemed to be redundant or out of date. (Crystal Schick/Yukon News file)
Out with the old

Council considers repealing outdated bylaws

A bobcat is used to help clear snow in downtown Whitehorse on Nov. 4. According to Environment Canada, the Yukon has experienced record-breaking precipitation this year. (Crystal Schick/Yukon News file)
Yukon will have “delayed spring” after heavy winter snowfall

After record levels of precipitation, cold spring will delay melt

Yukon RCMP say they’ve received three reports of youth being extorted online. (Black Press file)
Yukon youth being extorted online

Yukon RCMP say they’ve received three reports of youth being extorted on… Continue reading

A man walks passed the polling place sign at city hall in Whitehorse on Oct. 18, 2018. The City of Whitehorse is preparing for a pandemic-era election this October with a number of measures proposed to address COVID-19 restrictions. (Crystal Schick/Yukon News file)
City gets set for Oct. 21 municipal election

Elections procedures bylaw comes forward

A rendering of the Normandy Manor seniors housing facility. (Photo courtesy KBC Developments)
Work on seniors housing project moves forward

Funding announced for Normandy Manor

Tom Ullyett, pictured, is the first Yukoner to receive the Louis St-Laurent Award of Excellence from the Canadian Bar Association for his work as a community builder and mentor in the territory. (Gabrielle Plonka/Yukon News)
Tom Ullyett wins lifetime achievement award from the Canadian Bar Association

Ullyett has worked in the Yukon’s justice ecosystem for 36 years as a public sector lawyer and mentor

The Blood Ties outreach van will now run seven nights a week, thanks to a boost in government funding. Logan Godin, coordinator, and Jesse Whelen, harm reduction counsellor, are seen here on May 12, 2020. (Crystal Schick/Yukon News file)
Blood Ties outreach van running seven nights a week with funding boost

The Yukon government is ramping up overdose response, considering safe supply plan

Ranj Pillai speaks to media about business relief programs in Whitehorse on April 1, 2020. The Yukon government announced Feb.25 that it will extend business support programs until September. (Crystal Schick/Yukon News)
Government extends business relief programs to September, launches new loan

“It really gives folks some help with supporting their business with cash flow.”

Whitehorse City Hall. (Joel Krahn/Yukon News file)
A look at decisions made by Whitehorse City Council this week

Bylaw amendment Whitehorse city council is moving closer with changes to a… Continue reading

Susie Rogan is a veteran musher with 14 years of racing experience and Yukon Journey organizer. (Yukon Journey Facebook)
Yukon Journey mushers begin 255-mile race

Eleven mushers are participating in the race from Pelly Crossing to Whitehorse

Legislative assembly on the last day of the fall sitting in Whitehorse on Nov. 22, 2018. As the legislature prepares to return on March 4, the three parties are continuing to finalize candidates in the territory’s 19 ridings. (Crystal Schick/Yukon News file)
Nine new candidates confirmed in Yukon ridings

It has been a busy two weeks as the parties try to firm up candidates

Most Read