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 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 report found. The household debt referred to in the report includes mortgages and is based on data to Q2 2014.

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

“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.

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 signaled its concern for Canada's economic outlook by cutting interest rates – a move some fear will only prompt more borrowing.

Nothing to fear?

Many bankers, however, believe fear over Canada’s future is exaggerated.

Avery Shenfeld, CIBC chief economist, called the findings of the McKinsey report “overly alarmist and simplistic.”

In particular Shenfeld said comparisons made between current household debt loads in Canada and those in the U.S. leading up to 2008 are unfair. More of the debt in Canada today is held by people with the income to manage it, he said. That differs dramatically from the situation south of the border where sub-prime rates made it possible for borrowers who would not otherwise have qualified to take on huge loans that they couldn’t afford when the rates increased.

Besides, Canadians are no longer showing much interest in taking on more debt to buy another condo, car or home renovation.

“Interest rates are very low, but they have been low for so many years now that those who have been looking to jump on the opportunity have already jumped on it,” Shenfeld said.

Diana Petramala, economist at TD Bank, said the debt cycle in Canada reached its peak acceleration period 2002 and 2009, and has since slowed to a more manageable pace.

Petramala said record low interest rates are actually allowing Canadians to pay down their debts faster now than they have in the past.
But, she cautioned, anyone thinking of taking out a mortgage or a loan should always look beyond the current economic environment.

“Ask yourself, ‘What will my mortgage payments be in five years if they return to normal levels?’,” she said.
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.”