Canada

Canadian Household Debt Is Rising Faster Than Income At A Record Rate

Canadian household indicators are showing their debt problems are rapidly resurfacing. Statistics Canada (Stat Can) data shows the ratio of household debt to disposable income surged in Q2 2021. This measure indicates debt is growing faster than the rate of income. Debt as a ratio of income has actually never seen such fast annual growth in Canada.

Canadian Households Have $1.73 In Debt For Every Dollar They Make 

Canadian households are borrowing much faster than their incomes are growing. Household credit market debt to disposable income reached 173.08% in Q2 2021. That’s up 0.30% percent from the previous quarter, and a massive 8.61% larger than the same quarter last year. More bluntly put, Canadians on average had $1.59 in debt for every dollar they made last year. Now they have $1.73 in debt for every dollar they made last quarter.

Canadian Household Debt To Income

The ratio of Canadian household market credit to disposable income.

Source: Stat Can; Better Dwelling.

Households See The Ratio of Debt to Income Rise At A Record Rate

The jump from last year sounds big, but it needs to be seen in context to truly appreciate how large it is. The 8.61% annual increase is the largest seen going back to at least the 90s, but likely much further. It’s unusual for central banks to stimulate credit to this extent while households are borrowing.

Canadian Household Debt To Income Change

The annual percent change in the ratio of Canadian household market credit to disposable income.

Source: Stat Can; Better Dwelling.

Canada’s Boost To Household Income Was Transitory

The boosted credit growth is only partially due to credit outpacing disposable income. The other (larger) contributor is the pandemic’s distortion of disposable income readings. Government transfers at the start of the pandemic were much larger than the income lost at the time. It initially averaged two dollars of income support, for every dollar of income lost.

The temporarily boosted disposable income pushed the credit to debt ratio lower. In Q2 2020, the ratio fell to the lowest since 2009, losing 12.7% from the previous quarter. It would be amazing to see that kind of movement, but alas — that was simply a data skew. People were paying off more debt, but not to the extent the indicator might have implied to some.

There is a lot of focus on how costs have been skewed by temporary base effects, but not a lot on income. However, there was absolutely a temporary boost to disposable income. Support is now tapering, and debt indicators are rising close to pre-pandemic data. Experts currently see the most generous of supports completely gone by November. At that point, we’ll get a clearer picture of household finances, without the data skews.

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9 Comments

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  • JCH 1 month ago

    Thanks for the update on Cdn debt levels. But can you please explain this – “$1.73 of debt for every dollar of income”? This metric has never made any sense to me – dollars of debt is presumably the total at a given time, but income needs to have a time unit included. Is this total debt vs. ANNUAL income? For example, if I had $86,000 in debt, is this compared to my annual income of $50,000 to get the ratio? Or my monthly income?? Why do people always state this metric without clarifying the units?

    • Bob Walter 1 month ago

      Credit Market debt to Disposable Income = Credit Market Debt / Disposable Income * 100.0

      Where:

      Credit-market Debt refers to the current value of all existing mortgage loan liabilities, household lines of credit, and non-mortgage loan liabilities by all households.

      Disposable Income refers to the after-tax income earned by all households.

      Given that one does need special privileges on the Internet nowadays to look up facts and do research, I have done it for you this one time 🙂

      • JCH 1 month ago

        Well fortunately my own Internet privileges finally came through today, because your research still missed the key point I was trying to make: ‘disposable income’ is actually ‘disposable ANNUAL income’. BoC clarifies in this 2012 Backgrounder “Household Spending and Debt”: “An aggregate debt-to-income ratio of, say, 160 per
        cent tells us that the accumulated debt of an average
        Canadian household significantly exceeds one year’s
        worth of its income. Put another way, a debt-to-income
        ratio of 160 says that it would take more than one and a
        half times the annual income of an average household to
        fully pay off its debt. “

    • Paul 1 month ago

      Isn’t it based on quarterly reports?

    • KJW 1 month ago

      JCH it is a ratio. 1.73 : 1. Moreover, they state that this was the ratio for Q2 2021. So any/every dollar earned in that quarter would average $1.73 in debt held. This doesn’t need a specific date range.

    • Kaliucla 1 month ago

      It’s credit market debt to disposable income. So if after all bills and overheads the disposable income is $500.00/month, households on average are spending $865.00/month with the deficit end up on credit.

    • Antony Attisano 1 month ago

      Yes it is annual income.

  • Joe Hennessy 1 month ago

    It would not be so bad if everyone would stop taking advantage of covid and jacking price even used products are way over priced

  • JCH 1 month ago

    Thank you, Antony. I did finally look this up, and as you say, it’s comparing total debt to annual income.

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