Ontario Economic Update December 2018: Strong economy, creeping debt
Economic Update Takeaways:
- Ontario’s real median hourly wage rose to $25.54 in October 2018 from $25.00 in January. Conversely, wages in its two provincial peers (Québec and British Columbia) have declined since the beginning of this year.
- Ontario’s labour market is strengthening. Between January and November 2018, core working-age (25-54) employment went up by 158,600, the participation rate increased by 0.6 percentage points to 86 percent, and the unemployment rate fell by 0.4 percentage points to 4.8 percent.
- Ontario shoppers are expected to spend over $12 billion this holiday season, which may increase already high levels of household debt.
- Household debt has been steadily increasing each year with home mortgages accounting for over two-thirds of all household debt.
- For now, household debt service burdens remain low due in part to historically low interest rates. But households must plan carefully to ensure that they will be able to service their debt when interest rates increase.
Strong economy hampered by low participation
The latest release of Statistics Canada’s Labour Force Survey presents a positive picture of Ontario’s economy as it approaches the end of the year. Median hourly wages in Ontario were $25.54 in October 2018, up 2.2 percent since January. Ontario is the only province among its peers, Québec and British Columbia, to experience positive overall median wage growth this year. This trend coincides with strong employment growth, with the number of employed persons in the core working age group rising by 158,600 between January and November 2018. Despite these recent improvements, the labour force participation rate in Ontario continues to lag its peers. Although it has risen by 0.6 percentage points, to 86.0 percent, from October 2017 to October 2018, it remains below the rates of British Columbia (87.4 percent) and Québec (88.6 percent) (Exhibit 1).
Participation rate, 25-54 years old, Ontario and provincial peers (monthly)
High spending expected this holiday season
Strong economic gains suggest that consumer spending trends are in line with previous years as Ontario heads into the holiday season. Retail trade sales for many industries are naturally cyclical, with predictable highs and lows occurring during the same months each year. Trends among select industries with sales that peak during the holiday shopping season indicate that Ontarians’ consumer spending in December 2018 will be approximately $12 billion, before falling to around $7.5 billion in January. Interestingly, February is consistently the month with the lowest retail spending despite the perceived “buyer fatigue” that is expected in January (Exhibit 2). Between 2013 and 2017, December retail sales have been increasing by an average of 2.9 percent per year and are expected to rise by 3.7 percent this year. With the average household saving just $291 in 2016, borrowing some funds will be necessary to sustain holiday shopping.
Retail trade sales, Ontario, 2010- September 2018 (monthly)
Household debt levels continue to climb
Additional spending during the holiday season will inevitably increase the liabilities of households’ that rely on credit to pay for goods. Between 2010 and 2017, average household liabilities rose from $133,000 to $160,000. Non-mortgage liabilities such as credit card debt, lines of credit, and loans from financial institutions also rose over the same period: in 2010, the average household owed $48,000, increasing by 8.8 percent to $53,000 in seven years. However, the growing amount of non-mortgage debt is actually becoming a decreasing share of total household liabilities as mortgages get larger and push total debt higher. In 2017, over two-thirds of household debt (primarily mortgages) have been steadily climbing to $166,000 per household from $133,000 in 2010 (Exhibit 3).
Average household mortgage and other liabilities distribution, Ontario, 2010-2017
The allure of mortgages
Several other factors help explain the spike in mortgage debt. Like much of North America, homeownership is culturally treated as a necessary milestone in life. Moreover, a home is seen as not just a dwelling but also an important investment asset. Investing in a home builds equity that will continue to grow until the house is sold.
This notion of real estate as an investment has become more entrenched in recent years as home prices began growing rapidly in parts of Ontario. Since 2010, real estate has outperformed the S&P/TSX composite index (Exhibit 4). The lack of volatility in the housing market also makes real estate more attractive than financial markets to long-term investors. As a result, more people are taking mortgages to purchase their first home and the number of homeowners with multiple properties in the Greater Toronto Area has quintupled to 120,000 since 2000. However, the rising cost of purchasing real estate combined with tightened mortgage rules is pricing young Ontarians out of the market, a topic discussed in more detail in the Ontario Panel on Economic Growth and Prosperity’s Seventeenth Annual Report, Unfinished Business: Ontario since the Great Recession.
S&P/TSX Composite and average Ontario residential prices indices, Ontario, 2000-July 2018 (monthly)
Ontarians must prepare for the return to higher interest rates
Low interest rates in the ten years since the Great Recession are another major factor in the rise of household liabilities. With forecasts predicting that rates could reach 2.0 percent by 2020, there are concerns that households may be unable to service their debt. Ontario’s high household debt has merited the attention of national and international policy makers. However, since low interest rates have persisted for a decade, the debt service burden on the average household has trended slightly downwards since the peak of the recession in 2009 despite increasing debt levels. Currently, delinquency rates in Ontario are at the lowest rate since 1990 at just 0.09 percent, or just 9 in 10,000 mortgages.
The low burden of household debt is an impressive achievement, but policy makers must be cognizant that the province remains in a period of historically low interest rates. The bank rate is currently 1.75 percent, up from its low of 0.5 at the height of the recession in 2009 with much of the increase occurring since June 2017. While it can be argued that the bank rate has more than tripled in a decade, the economy remains in a very low interest rate environment when considering past rates. The interest rate in 2000, 6.0 percent, is much higher than today’s rate which itself pales in comparison to the double-digit rates of previous decades. Increases in the bank rate by the Bank of Canada will take into consideration the effects of domestic consumption and the housing markets, as well as international developments in bilateral trade. For now, it can be easy to fall into a sense of complacency but consumers and policy makers alike must remember that low rates are still the exception, not the norm. Unchecked public and private spending may result in Ontario becoming embroiled in a debt trap once interest rates return to higher levels.
Written by: Weseem Ahmed
 Household net saving is calculated by subtracting household consumption expenditure and adding changes in pension entitlements to household disposable income. Average household values were calculated by dividing the total amount of net saving by the number of households in the 2016 Canadian census.