16 March 2018

The Canadian Press got the Finance Department document with the label “secret” under the Access to Information Act.

While a high household debt level can cause deeper and longer recessions in the country, a too low number may push homeownership rates down to even sub-optimal levels, the memo says.

Nevertheless, according to the document, such static calculations about debt can’t show us the full picture as they ignore many other factors, e.g. policy changes aimed at slowing the debt growth.

“The main thing which drives the sustainability of debt is whether paying it off is affordable and whether it poses any systemic financial risk,” – noted the memo.

The document focuses on all possible impacts of the central bank’s decision to raise rates.

It includes two main influence variants:  the rate hikes will increase the cost of servicing the debt loads and raise interest-sensitive spending (e.g. on cars, real estate and business investment).

However, as the Bank plans to raise rates gradually, the document says Canada’s economy will be able to absorb the hikes.

When it comes to the household-debt-to-disposable-income ratio, certain specialists see it as only one of the numerous factors. They suggest looking into the composition of the debt, mainly – how much of it poses strong risk.

“This ratio hides more than it shows,” – Benjamin Tal, CIBC’s deputy chief economist, says.

“So the fact that Finance officials don’t have an optimal level and can’t say if it’s too high, points to their rational thinking on this issue, and it’s encouraging.”