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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Good point. If credit isn’t growing very much, that means real incomes are falling or interest rates are squeezing households. We’re going to get demolished when we can’t keep up with the US hikes.
$2000 iPhones, here we come!
Damn. So if Macbeth is right, and we’re already seeing wage growth fall behind debt growth, how much does unemployment rise during the next recession?
Am I missing something? 170% means it would only take 2 years to pay off. Why is this a problem?
In this setting “Disposable income” means income after taxes and mandatory contributions. That is, the money you get to live on. So someone with a DTI of 170% could pay off the loan in less than 2 years, if they spent nothing on anything else (no food, no rent, etc.).
Also, it’s averaged over the population. Some households have a DTI of 0. Some have a DTI of 500%. When the average number creeps up, that is an indicator that the proportion of households with problematic debt levels is also creeping higher, and this eventually becomes a major problem. And as more money goes to service debt, there is less available to keep the machine running.
You are missing everything 🙂
If average household debt is lets say 150k (mortgage + consumer credit) based on median income of 75k after tax, how many HHs save 75K annually (after all daily living expenses) to pay it back in 2 years?? What is the savings rate of canadian HHs? All of this under the lowest interest rate environment in the history of financial institutions!!!!
People are living hand to mouth with very little savings, in constant fear of cost of living increases and you are talking about repaying debt within 2 years!!!
$150 000 is average? I don’t know many people with less than $400 000 in debt (mortgage, HELOC, car loans, credit cards, loans from higher ed. schooling). Most folks seem to have debt servicing bills in the $4000+ a month range. That is a stressful sum to keep fed.
The only folks I know with debt under $150 000, don’t have children are areemployed in well paying professions.
For context, i’m talking about families headed by folks in their 30’s and 40’s living in the suburbs of Toronto. My friends in their 50’s might have a $120 000 HELOC but little else in terms of debt. They bought real estate when it was cheap and paid it off quick to get rid of high rate charges.
Because you literally wouldn’t spend money on anything else including the necessities of life, like food, water, shelter, heat, medication, dentist, personal hygiene, transportation, communication and so on.
No need to worry we have plenty of min wage jobs for everyone so forget 9-5 and work 2 or 3 sidejobs and bar tend or moonlight weekends. More money for the government in order to pay for inflated housing prices in urban centres. My town has a population of 40 000 and I am happily consumer debt free.
It boggles my mind how so many Canadians are simply comfortable living with so much debt. In my line of work, I have access to credit reports, and there are a lot of people out there with multiple credit cards/loans/lines of credit, and just pays the minimum balance on those. Some of these people take out 80k car loans and finances them for over 7 years. The numbers are incredible, but this seems to be the norm.
It sometimes feels surreal, knowing the how much debt Canadians hold as a whole, with the DTI levels, and the astronomical prices of homes.. that the “bubble” has not burst yet. So far, the economy seems to be holding up just fine.
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