Canada

Canadian Household Debt To Income Surges, Previous Quarter Revised Higher

Canadians didn’t see their debt problems improve nearly as much as previously thought. Statistics Canada (Stat Can) data shows household debt to income made a big quarterly jump in Q3. The rise was accompanied by a substantial upward revision of the previous quarter. The ratio has now already retraced half of the drop it made at the beginning of the pandemic. 

Household Debt To Income

The household debt to income ratio is the percent of outstanding credit to disposable income. The debt is calculated by using an aggregate of all household debt. Disposable income is the aggregate of income that remains after mandatory transfers. Put bluntly, it’s the ratio of how much money people owe, compared to how much they make. Straight forward.

Understanding this ratio is also fairly straight forward. Generally speaking, when the ratio rises, households are seeing debt grow faster than income. This means the economy is growing based on borrowing future income growth, which isn’t great. When the ratio falls, income is rising faster than debt. This generally means a healthier economy, with a few exceptions. One would be when we saw the ratio fall in the previous quarter, due to government income supports. It’s become much harder to filter noise during the pandemic.

Canadian Household Debt To Income Hits 171%

Canadian household debt to income made a substantial jump in the past quarter. The ratio reached 170.70% in Q3, up 4.85% from the previous quarter. Compared to last year, the ratio is still 5.98% lower. The ratio is lower than the previous year, but the rapid quarterly rise shows this may be temporary.  

Canadian Household Debt To Income Ratio

The ratio of household debt (mortgage and consumer) to disposable income.

Source: Stat Can, Better Dwelling.

Previous Quarter Revised Over 4 Points Higher

Another important point in the latest data is the revision of the pandemic’s first full quarter. Changes in data caused the household debt to income ratio in Q2 to be revised to 162.80%, up over 4 points from the previous read. Revisions are fairly normal, but this speaks to the volatility of pandemic numbers. This revision was so large, it’s higher than most other quarterly movements. The information in this economy isn’t all that helpful. 

The recent trend during the pandemic is providing more noise than insights. Household debt to income made a big jump in Q3, but that was due to an odd second quarter. The ratio made a sudden drop in Q2, but it was largely due to government transfers exceeding the amount of income lost. As these programs expire, the ratio began to retrace more than half of territory lost. The next quarter is likely to provide better insights, but they will still be limited. This indicator is likely to be a little wonky until things get back to normal.

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4 Comments

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  • Party on 10 months ago

    At the end of September, 2020 the total debt outstanding in Canada (bottom line of the Statistics Canada credit market summary data table) was $9.336 trillion. At the end of September, 2019 the total debt outstanding was $8.567 trillion. In the 1 year period from the end of September, 2019 to the end of September, 2020 it increased by $769 billion. This is an increase of 8.9%.

    Update on the total (household, business, and all levels of government) debt numbers in Canada and the size of the Bank of Canada’s balance sheet

    https://owecanada.blogspot.com/2020/12/update-on-total-household-business-and_11.html

    • Jimmy 10 months ago

      I guess income went up?

      Or gov’t paid us more?

      What could go wrong…

    • The Truth Shall Set You Free 10 months ago

      The very same blog you highlighted says,

      “At the end of September, 2020 the total debt outstanding in Canada was 4.2 times greater than the annual GDP at market prices, and looking at just the total debt outstanding of domestic non-financial sectors, that was 2.9 times greater than the annual GDP at market prices.”

      Does this not mean that actual debt to GDP (non-financial sectors) is 290% and not the figure of 170% they tout in the article above?

      • Smaug 10 months ago

        170% refers to household only. Total non-financial debt refers to households and corporations.

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