Canadian Household Debt To Income Temporarily Plummets Due To Government Support

Canadian households were in the biggest recession since the Great Depression, but it looks like an economic boom. Statistics Canada (Stat Can) data shows the household debt to income ratio dropped in Q2 2020. The ratio had grown to notoriously high levels in the past decade, which were wiped out overnight. The national statistics agency said this is partly due to government support, which means the declines are likely temporary.

Household Debt To Income Ratio

The household debt to income ratio is the proportion of outstanding credit to income. Household debt is calculated by using the aggregate of mortgage and consumer debt. Disposable income is the amount of income households have left after mandatory transfers.

The ratio is helpful in understanding how quickly debt is growing relative to the rate of income. If it rises, usually debt is either growing faster than income, or income is falling. If it falls, income is rising faster than debt, or debt is falling. It’s important to understand there’s a number of reasons why these numbers could change direction. A decline is generally considered  good, while an increase is generally bad.

Canada’s Household Debt To Income Ratio Drops To 2009 Levels

The household debt to income ratio dropped to the lowest level in over a decade. The ratio fell to 158.21% in Q2 2020, down 9.78% from the previous quarter. Compared to the same quarter one year before, this represents a 9.84% decline. This is an absolutely massive drop, and completely perplexing at first glance. 

Canadian Household Debt To Income Ratio

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

Source: Stat Can, Better Dwelling.

Did Canadians just knock off a decade of debt burden in just a quarter? Not exactly. Mortgage debt grew substantially, virtually wiping out the decline in consumer credit. Instead, this likely has to do with government support measures.

Remember, a rise of income can reduce the debt to income ratio as well. As StatCan noted, government transfers to households have increased to “alleviate the economic impact” of the pandemic. The rise in transfers is higher than the decline of income, leading to a temporary decline in the debt to income ratio. As support measures phase out, or adopt higher barriers, this number is expected to rise once again. In other words, the decline in debt to income ratio isn’t the positive indicator it normally is, and doesn’t indicate a healthy economy. It indicates a temporary boost of income, due to the fact households were so heavily indebted, they couldn’t handle the economic shock without government income supports. 

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  • Party on 2 years ago

    At the end of June, 2020 the total debt outstanding in Canada (bottom line of the Statistics Canada credit market summary data table) was $9.319 trillion. At the end of June, 2019 the total debt outstanding was $8.447 trillion. In the 1 year period from the end of June, 2019 to the end of June, 2020 it increased by $872.4 billion. This is an increase of 10.3%.

    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

  • kwo 2 years ago

    Or you could just say that the government started printing money and shovelling it out as fast as they possibly could. Wow, Trudeau is really good with his shovel. A little bit too good maybe.

  • Laurel 2 years ago

    Does this not mean a lot of people are making more money on CERB than they were without it?

    • The Truth Will Set You Free 2 years ago

      It means exactly that. It’s like how the condo segment of the real estate market rose to unprecedented levels (from an average of around 250k to now 550k) brought the average of home prices up as the bottom rose. So too are people who weren’t making 500 a week all of a sudden having their incomes rise to increase the bottom. This completely skews data and in turn the real estate boards and large brokerages take this data and manipulate individuals who don’t know better to increase home prices when unemployment is north of 10% and expected to rise to as much as 30% when CEWS ends and the colder weather hits restaurants who have these pop up patios.

  • Oldguy 2 years ago

    A lot of governments have been waiting for an opportunity to inflate the federal debt away. As a famous real estate developer ( D. Trump, 1981) once said: “Saving is for suckers; pile on the debt”.
    So now we are off to the races. But don’t forget that once the game starts, it is very hard to stop.
    Good luck,Canada.

  • Mike 2 years ago

    There were kids working at employers such as the CDN Tire, staples, clothing stores, and many others that were only making $1000 a month which got an immediate raise to $2000 no questions asked as they were sent home for a couple months.

    Does the average household income include minors? what about adult kids living at home? So many variables.

    • Andy 2 years ago

      For some, yes that may be the case. But I’m not getting any assistance, yet my debt ratio is also getting better. Working from home means no fuel costs or car maintenance going back and forth to work. No eating out. No concerts or shows. No move theaters. No bars. Spending less on hair and clothing, makeup, other personal grooming. Discounts on electricity. Etc. It all adds up. We’ve managed to save up almost $20k since March that we normally wouldn’t have.

      • Ed 2 years ago

        That’s an anomaly, and the original point isn’t up for debate. It’s a direct observation from StatCan, handling the data.

    • The Truth Will Set You Free 2 years ago

      Actually went to 3000 as under CERB people were allowed to make 1000 a month while still applying for the additional 2000 or 500 a week (more than 2k per calendar month as there are technically 4.33 weeks in a month).

  • panaka_09 2 years ago

    So printing money(form of debt) to pay debt…

    Taking from one pocket and put in another one.

  • Jason Webb 2 years ago

    The credit card debt dropped because discretionary spending plummeted during the full Lockdown period. No spending on movies, night clubs, concerts, restaurant dining, or even take-out for the first little while. All the unspent money went to pay down credit cards.

    The small number of part-time workers who got a pay raise would not have had any significant credit card debt due to low credit limits (if they even had credit cards).

    • The Truth Will Set You Free 2 years ago

      Read the last paragraph of the article. It’s not due to credit card debt not rising. This is specifically due to the fact that a lot of technically part time workers got a raise due to the CERB program. People who were making no where near 500 a week on the regular now making that much plus whatever they made up to a max of $ 1000 every 4 week period as they were getting the payments from the Government no questions asked. So the average income level increased upward and this made the debt which they stated did in fact climb look not as bad as the debt to income ratio came down. It’s all make believe. Wait til you see the numbers on the other side. Guaranteed Trudeau is hoping he isn’t re-elected come the election as what he’s dealing with will make him look very bad. Either way in power or out he’s going to be remembered for blowing up the debt with his ‘…and the budget will balance itself’ ideology.

  • Jake 2 years ago

    It would be interesting to see this data segmented into percentiles. I feel the largest impact is coming from the bottom 25%. I’m assuming this is a not a weighted average, but a simple average where each person has a similar weighting? Could someone please confirm this… I think there’s a lot more that can be done here to tell a story, because right now I believe this is inadequate and you’ve extrapolated your results to all Canadians. I know professionals downtown Toronto are getting decreases to discretionary pay, lower increases so it’s very heard for me to believe their ratio is improving – especially because in pure quantity they have the largest gross debt in the country. Please think more critically before telling only a tiny piece of a bigger story.

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