Panel discussion on household debt in Canada

2011 CEA Conference

Umar FaruquiFinancial Stability Department

Bank of Canada

Disclaimer: The views express in this presentation, or in my remarks, are my own, and do not necessarily represent those of the Bank of Canada’s Governing Council.

Goals of this panel presentation

1. Give insights into how researchers at the Bank of Canada view and use micro/macro data on household balance sheets

2. Outline some of the research currently underway at the Bank on household indebtedness.

3. Highlight areas which need to be developed further in order to further our understanding of household debt behavior.

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Main takeaways from the presentation

Discrepancies between micro and macro-data should be expected and accepted.

Choice of micro vs. macro data on household finances depends on the questions we are asking of the data.

Better/more timely micro-data is important to continue improving our understanding of household debt behavior.

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Micro- vs. macro-data on household debt

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0.6

0.8

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The debt-to-income ratio of the Canadian household sector

Last observation: 2010Q4Source: Statistics Canada

1999 SFS Survey

2005 SFS Survey

Micro- vs. macro-data on household debt: why the inconsistency?

Should we be worried?

Not necessarily. Number of reasons why the two estimates might be different. Definition of variables

Coverage of data

But what if the differences can not be fully explained/rationalized? Data revisions for macro-data

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Mixed use of micro- and macro-data on household finances

Macro data as summary of broad trends….

…but micro data is the workhorse in analyzing key questions about household debt behavior

We use a number of micro-data sets including SFS, SHS, CFM, Equifax, and OSB micro-data on insolvency

Main reason is that aggregate data can mask distributional issues:

For e.g. : Aggregate indebtedness statistics suggest reason for concern but only if debt is being taken by those not able to handle the higher debt level

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The Bank is continuing to improve its understanding of household debt behaviour

Two projects that I am currently working on are:

1. Investigating the fundamental drivers of household credit growth in Canada since 2000.

2. Identifying the key factors that determine household insolvency in Canada.

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Project 1: Investigating the drivers of household credit growth in Canada since 2000.

Data Set: CFM micro-data for 1999-2010

Was debt growth demand or supply driven?

Easing of credit constraints vs. easier borrowing conditions.

What impact did house prices have on debt growth?

What role did demographic shifts play?

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Project 1: Investigating the fundamental drivers of household credit growth in Canada since 2000.

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<=25 26-30 31-35 36-40 41-45 46-50 51-55 56-60 61-65 66+0.0

5.0

10.0

15.0

20.0

25.0Distribution of household sector debt by age of household head

1999 2009H2-2010H1

Age groups

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Project 1: Investigating the fundamental drivers of household credit growth in Canada since 2000.

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<=25 26-30 31-35 36-40 41-45 46-50 51-55 56-60 61-65 66+20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0 Indebtedness by age of household head1999 2009H2-2010H1

Age groups

Inde

bted

ness

Sha

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Project 2: Identifying the key factors that determine household insolvency in Canada.

Data Set: OSB micro-data on insolvent households and CFM micro-data; 2003-2010.

What micro and macro factors contribute to household insolvency?

Main use would be for our FSR stress test of the household sector.

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Some areas need further work in order to advance our understanding of household behaviour

More/better micro-data is key.

Enhanced and more frequent household surveys by Statistics Canada would be a step forward.

CBA can also help advance the cause by allowing researchers access to a (random sample of) micro-data on household loans

Better awareness amongst academics and market analysts of the strengths and weaknesses of using micro-data

When to use it and when not to use it.

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Summary

Discrepancies between micro and macro-data should be expected and accepted.o Both micro and macro-data on household finances are important in their

own right and neither set gives the full picture of the underlying reality.

Choice of micro vs. macro data on household finances depends on the questions we are asking of the data.o Micro-data are essential to explore distributional issues related to household

indebtedness.

Better/more timely micro-data is important to continue improving our understanding of household debt behavior.

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Questions/Comments?