Canada’s highly indebted households are in a pickle after an epic debt binge. Statistics Canada (Stat Can) data shows the household debt to income ratio (DTI) climbed sharply in Q3 2022. Canada already had some of the most highly indebted households in the world. As the ratio climbs even further, they become more vulnerable to economic shock.
Household Credit Market Debt To Disposable Income
Household credit market debt to disposable income is a measure of relative indebtedness. Credit market debt includes mortgages, non-mortgage loans, and consumer credit balances. Disposable income is what households have left after mandatory deductions such as taxes. The ratio yields important macro insights about households and the economy.
Climbing ratios mean debt is accumulating faster than income is growing. This means more risk, since households are providing economic growth with future income. Unlike business borrowing, the debt isn’t a gamble on future economic output or income growth. It also means households are more sensitive to interest rate hikes or shock.
Falling ratios mean income is rising faster than credit. Growth is being primarily driven by income, which is generally good. No credit utilization is worrisome, but once the DTI rises above 70%, economists consider it an economic drag.
Canadians Owe $1.83 For Every $1 They Take Home
Canada’s household DTI has been climbing aggressively over the past few quarters. The ratio hit 183.3% in Q3 2022, rising 4.3 points from last year. In other words, Canadians owe $1.83 for every $1 they take home. That might not sound like a lot, but remember this is the average where many people have no debt. It’s extremely high for a developed country, and every point increased above 70% is a drag on GDP growth.
Canadian Household Debt To Income Ratio
The ratio of credit market household debt to disposable income for Canadian households.
Source: Statistics Canada; Better Dwelling.
Canadian Debt To Income Is Re-Approaching The Record High
Household DTI is at one of the highest levels ever, but falls short of the record… for the time being. Back in Q4 2021, the ratio was about a point higher. During the peak of the 2018 rate hike cycle, it was also slightly higher. However, it’s not hard to see this smashing through those records with relative ease in the coming months.
Rising financing costs reduce principal payments, especially on variable rate loans. Since most outstanding credit is mortgage-related, this will have a big impact. Not only on variable rate debt growing, but low rate mortgages will also renew at higher rates. As interest costs take up a much bigger share of payments, the pile is likely to rise fast.
Important to understand it’s much worse than this. These numbers don’t include private loans.
The mortgages for the record shopping spree on new construction and the record building doesn’t come until completions either, and with prices down 20%, investors are going to have to find double the money for a downpayment.
That doesn’t seem like that much.
You have to realize it’s not one person’s debt, but nearly 2/5 of people have little to no debt, and 1/5 have debt less than their income. So really 2/5 people are highly indebted, which is just bananas.
Hey Jeremy, where are you getting those stats from? From the Debt and HELOC numbers published over and over. I generalize the debt owners into the following. NOTE > > >This is just a theory – based on published stats.
The first group (lets call them the OG w/ little/no debt) took on HELOCs and some are Smithing to reduce taxes. They’ll be fine here. They’re the ones who likely gave money away to relatives to buy a home.
The second group likely near the end of the mortgages and at top of their careers. Some also took on HELOCs and are Smithing to reduce taxes. Some of this group are people w/o mortages and are just starting out (new grads, young pros).
The final group is in for a hurting. They’re most likely all first time home buyers who bought in the last ten years. Half will be okay with some belt tightening as I assume they’re all Smithing with their equity/HELOC to reduce taxes. It is the newest group (2017-2022) who are in for a bum hurt. Clearly, they didn’t study compound interest and previous housing bubbles. EVEN AFTER THE GFC which isn’t that long ago.
RBC just said their first time buyers were replaced with investors. If you bought before 2020, you’re paying used bubble gum and scrap paper for your mortgage.
Certainly not disagreeing with everything you’re saying, but you’ve definitely got a way overinflated sense of how many Canadians are “smithing”. If it’s 1/100 homeowners I’d be astounded.
What is meant by Smithing?
Reply to Jaime (there’s no reply button after your post)
Smithing = The Smith Manouver. It’s something to take advantage of tax laws in Canada.
Basics of it is to:
1) borrow money (e.g. HELOC, LOC) and invest it into dividend paying stocks.
2) Declare this investments / gains / dividends as income and get taxed on it on your annual tax filings.
3) The interest portion of the debt is tax deducatable, thus lowering your taxes – which frees up more of your hard earned moolah.
4) Take the dividends (gains after taxes) and invest it again, or pay down your mortage. You always want to keep debt so you can deduct it. Look up (LDI) – this is a form of LDI that the government encourages for those who understand income taxes and investments.
5) Here’s where it get’s messy, as soon as you pay your mortage – this unlocks more Equity in your house. Thus, allowing one to borrow more from the HELOC. This is great when the market is going up (Low interest rates on DebtS – yes, CAP S – Mortage, HELOC, LOC, etc). REALLY BAD when the market is coming down (Higher interest rates on DebtS).
The layers to the Debt Onion will be our undo-ing. Throw in money laudering and fake mortgage documents. Canada is in for a hurting.
1 in 100 is still a sizable tax base that is paying less taxes and driving up housing costs. Remember, house prices are set at the margins.
When actor A has 400K of equity and feels like taking out 200K for a 700K new build. The system supports this type of behaviour.
Now take that 200K instead and put it into pro-constructions and now actor A is in a bit of a pickle with no one left to hold the hot potato.
Someone with 400K equity should escape whatever’s coming just fine as long as they cash out before the domino effect takes hold.
How is it possible that rates fell and people were supposed to pay off their debt, and then added more to the pile? LMAO
The real reason CBs lower rates is to stimulate credit demand, and more borrowing to drive inflation. Politicians intentionally lie about this, but look at BOC announcements early on. It was specifically about trying to create inflation.
Willing to bet private mortgages which aren’t in this number, have surged to a new high as an off-balance risk the government has no clue really exists.
You have a valid point. In my defense, I’d like to say that I began my comment with “In ALL your posts…”. So I wasn’t just commenting on the current post (or not much at all) but the general view created by Better Dwelling that the buyers should have been more alert.
I love it how, in all of your posts, the consumer is portrayed as either greedy or stupid. You don’t seem to be able to register the reality that people need shelter… decent shelter. If you constantly put it out of their reach, they will be forced to squeeze their savings, their lifestyles, their futures, just to get that matchbox townhome. So is the consumer being greedy by availing the low rate that were made available to them? Or maybe.. just maybe… the real estate industry has been greedy for decades by restricting supply and and keeping demand unsatisfied. Did the shelter-buying consumer put a gun to the BoC’s head to lower rates that fed the buying frenzy? Did this consumer start the Ukraine war? Did this consumer cause the supply chain bottleneck? But it IS this consumer who is being made to take it on their chin to “lower inflation” that they didn’t cause in the first place. Cuz this consumer doesn’t really have a voice.
Easy with the personal projections, bud. Did you even read the same piece? Because they don’t say anything about the consumer other than they accumulated debt and will have to pay more when fewer dollars are applied to principle.
That isn’t an indication that consumers are stupid or smart, though I would argue that makes them dumb as rocks if they did this for “shelter.”
Blame the players, not the game? Everyone is to blame – but I’ll put the biggest blame on lack of oversight from Gov and Institutions that are there to pretect Canadians. We’ve been sold out over and over again to foreign interests. And before people start blaming China. Look South – US corps own much of Canadian assets. Something never seen before is coming. Buckle up.
Well you reap what you sow.
It was inevitable that if you keep falsifying the real value of a dwelling / plastic , mortar and glass and a bit of wood , you would end up living in an overpriced cave.
Thus to cry of being house poor is an oxymoron.
Growing up as a family of 13, mom and dad ,five girls and 6 boys, when we needed an extra room we added on to the house.
Our house was only as valuable as the material that was put into it. And today we have moved to contour the world , we’re all grandparents and our kids and grandkids have become house poor.
But hear this, the old house of our childhood is still standing and being lived in and is still only worth the value of its raw material.
If a society is to survive , a home should never be worth anymore than the sum total of its parts.
You know what, Dorim. You’re spot on! But its not in our control. The price of property has been inflated by the market manipulators, not the consumer. And I’m only talking about the shelter buyer. I’ve paid 7 times what the material of my house is worth, but if I wanted to pay just the value of the material, I’d have to move to Saskatoon or something, and not the GTA. “Value” – so we’ve been taught – is added by the proximity to civic services, urban centres, leisure centres, employment hubs, transportation, etc. And then there’s the demand/supply manipulation. So I think I paid 1X for material, about 2.5X for value-adds, and 3.5X for just getting suckered by the market manipulators.