Market Buzz – Pay Down Your Debt Canada 

The S&P/TSX Composite Index closed down 1.17% on the week and is up just over 5.5% in 2013 so far. Gains on Toronto’s main index year-to-date continue to pale in comparison to U.S. indexes where the S&P 500 is up just under 25% on the year.

A story that is receiving a good deal of attention North of the border involved the latest data from StatsCanada. The government number cruncher reported Friday that the level of household credit market debt to disposable income in Canada increased to 163.7% in the third quarter from 163.1% in the second quarter.

That means Canadians owe nearly $1.64 for every $1 in disposable income they earn in a year.

Policymakers and many international investors are fixated on the debt ratio in part because it was at above 160% that households in the United States and Britain ran into trouble about five years ago, contributing to defaults and the financial crisis that triggered the 2008-09 recession.

Before you start to assume that we are extrapolating a Canadian debt crisis, we will stop you right there. But as debt adverse investors, we do not believe the country is headed in the right direction and believe that many in this country should “give their heads a shake” and stop living beyond their means. It is not sustainable and often leads to a scenario where the responsible pay for and suffer for the irrational and selfish behaviour of the irresponsible.

Growing debt levels are a worrying trend and should truly be the focus of the report, but the collective media (both financial and not) is telling us there is some great news in this report. The sunshine comes from the fact that household net worth hit a record high of $7.5 trillion. That’s an increase of almost 2% quarter-over-quarter, thanks mostly to rising housing and equity prices. We immediately question if both the former and the latter are sustainable, but that is for another column.