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Alarm bells sound over 'unsustainable' household-debt levels in Canada

Alarm bells sound over 'unsustainable' household-debt levels in Canada

Household debt levels in Canada, along with a number of other advanced economies in Europe and Australia, have reached alarming new highs in the seven years since the global financial crisis, leading some analysts to wonder if we aren’t headed for another big crash.

A report published by the McKinsey Global Institute this week raises the possibility of a fresh risk of recession, noting household debt-to-income ratios have continue to grow in many countries at an “unsustainable” pace.

Canadians, in fact, have taken on so much debt in the years since 2008, the jump in the country’s debt-to-income ratio is second only to Greece.

The United States and Ireland, two of the hardest-hit countries in the financial crisis, have seen the most progress in managing debt, the report found.

“In many other countries, however, household debt has continued to rise rapidly. In the Netherlands, Denmark, and Norway, household debt now exceeds 200 percent of income—far above US or UK household debt at the peak,” the authors wrote.

Household debt also continues to grow in South Korea, and Australia. In China, household debt has quadrupled in seven years, “but remains at much lower levels relative to income than in advanced economies,” the report states.

The report’s findings come as Canada’s economy has slowed in the wake of slumping oil prices. At the same time, house prices continue to climb, albeit at a less hectic pace.

Last month, the Bank of Canada signalled its concern for the economy outlook by cutting interest rates – a move some fear will prompt more borrowing.

More recently, four major Canadian banks were downgraded by Barclays, another signal of the ongoing economic struggles.

According to the authors of the McKinsey report, unsustainable levels of household debt in the United States and a handful of other advanced economies were at the core of the 2008 financial crisis:

“Between 2000 and 2007, the ratio of household debt relative to income rose by one-third or more in the United States, the United Kingdom, Spain, Ireland, and Portugal. This was accompanied by, and contributed to, rising housing prices. When housing prices started to decline and the financial crisis occurred, the struggle to keep up with this debt led to a sharp contraction in consumption and a deep recession.”