In this week’s EconMinute, we’re talking about International comparisons of household debt.
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Countries around the world are raising interest rates in an effort to stem rising inflation. Higher interest rates raise the cost of borrowing, which slows consumption and helps to place downward pressure on prices.
However, high interest rates carry a risk for highly-indebted individuals, companies and governments. The higher rates go, the more money will be spent not on basic necessities but on paying interest on existing or new debt.
With that in mind, how does household debt in Canada compare to other countries? According to the OECD:
- Household debt in Canada was equivalent to 177.3% of disposable income in 2020, by far the highest of any G-7 country.
- The next highest country was the UK, at 147.7%.
- Meanwhile, the US, Germany and Italy have the lowest household debt, all of which were near or below 100% in 2020.
As a result, Canadians spend about 13.5 cents of every dollar paying the interest on existing debt – about 65% more than American households and close to triple what Italian households spend.
The difference between Canada and the US is especially noteworthy. Up until the 2007-2008 financial crisis, household debt levels in the two countries were about the same. However, while US housing prices fell in the wake of the crisis, Canada’s continued to grow. Canadian mortgage debt soared, creating a wide gap in debt levels between the two countries.
In short, Canadian households are in a much weaker position to withstand higher interest rates compared to their G-7 peers.