Canadian households just demonstrated debt is more complicated than bank economists think. Statistics Canada numbers, adjusted by former Maclean’s business editor Jason Kirby, show Canada’s debt to income ratio made a huge jump in Q3 2018. Canadian debt to income levels are now back above the US pre-Great Recession peak. That level, which is notoriously high, was last breached five quarters ago.
Debt To Income Ratio
The debt to income ratio (DTI) is one way to gauge the vulnerability of households due to debt. The DTI is the ratio of household debt to disposable income. Disposable income in this case is the amount of income a household makes, less mandatory contributions. That is, the income left over after taxes and mandatory contributions are removed. It’s a simple but powerful indicator, if you know what you’re looking for and why.
The DTI tells us a lot of things, but most important is debt vulnerability and credit expansion potential. The higher the ratio, the more money required for servicing the debt. As interest rates rise, the cost of maintaining that debt also rises. The rise reduces consumer spending, and increases the number of credit defaults. That’s a big negative for assets that need large amounts of financing, such as homes. It also amplifies shock, such as a decrease in credit liquidity. This can turn a routine recession into a financial crisis.
Lower ratios mean less income is needed to service debt, allowing credit room to expand. Borrowers with low DTIs are able to make more prompt payments, and tend to default less in the event of shock. Low risk, means there’s also room to grow debt levels. That’s a positive for assets that require large amounts of financing. We want the ratio to fall, the lower the level, the less risk for households.
Why Are Your Numbers Different From Stat Can?
Statistics Canada uses a different methodology from the US’ Bureau of Economic Analysis (BEA). Canadian numbers exclude disposable income and credit market debt of non-profit institutions. US numbers exclude credit market debt of unincorporated businesses. There’s also a few other changes needed to make them directly comparable. It’s a little time consuming to get numbers that can be directly compared. Lucky for us, Kirby keeps a running tab of the adjusted numbers.
Canadian Household Debt To Income Is Back Above US Peak
Canada is seeing the household debt to income rise back above the US peak debt. Canadians had a DTI of 166.79% in Q3 2018, up 0.15% from the previous quarter. When compared to the same quarter last year, the ratio is 0.18% higher. The bulk of the increases from last year, came in the most recent quarter.
Canadian Household Debt To Income
The debt to income ratio, adjusted to match US reporting standards.
Source: Statistics Canada, BEA, Jason Kirby, Better Dwelling.
Following two quarters of consecutive growth, the number is back above US peak debt before the Great Recession. The most recent quarter showed Canadian debt is 0.10% higher than peak US debt, reached in Q4 2007. Canada is still 0.2% lower than the peak hit in Q2 2017, but the trend is showing the potential to reverse. Keep in mind that the debt balance is now growing with low credit growth, and falling home sales.
Canadians are back to growing debt faster than income levels. That’s pretty impressive, considering Canadian debt is growing at one of the slowest paces in history. Income growth is failing to grow at needed levels, even before the recession.
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