Canadian Households At “Risk” As Debt Nearly Doubles Income 

The Canadian central bank’s addiction to low rates helped households rack up dangerous amounts of debt. Statistics Canada (Stat Can) data shows the household debt to income (DTI) ratio smashed the previous record in Q1 2023. Households are now the most highly leveraged in the country’s history, as they borrow money at a significantly faster rate than their incomes are growing. 

What Is A Household Debt To Income Ratio? 

A household debt to income ratio is the ratio of debt held by a household, in contrast to their income. A rising ratio means debt is accumulating faster than income. A falling ratio means income is rising, and/or households are paying down their debts. 

Generally speaking, a stable or falling ratio is ideal. A rising ratio is often accompanied by an economic boom, but drags future growth as people repay that debt. The reason is the debt utilized gives a short-term boost to consumption today, at the expense of income later. The higher the ratio, the bigger the drag will be, and the greater the odds of a financial crisis. 

Canadian Households Hit A New Debt Leverage Record

Canadian households are borrowing like there’s no tomorrow. The DTI ratio climbed 6.2 points to hit 198.5% in Q1 2023. It’s a massive increase, pushing debt to nearly double the share of income. The ratio also happens to be the highest ever recorded in Canada’s history, with Stat Can flat out calling it a “financial risk.” 

Canadian Household Debt To Income Ratio Hits A New Record

The ratio of debt to disposable income for Canadian households. 

Source: Statistics Canada; Better Dwelling.

Moral Hazard Is Fueling Unusually Fast Credit Growth

A sharp seasonal move is expected between Q4 and Q1, as holiday income tapers and people pay their holiday bills. However, the 20.7 point increase in Q1 2023 was unusually large, implying debt accumulated 10% faster than income. That’s like borrowing $110 for every $100 in new income in the quarter.  

For context: In terms of points, the quarterly increase was nearly double the move seen a year before, and nearly 5x the increase seen in 2019. 

Canadian households haven’t let their low income growth deter consumption, they’re making up for it with debt. With such a high surge in credit relative to income, it’s easy to understand how the economy is outperforming expectations. No logical model would forecast households suddenly borrowing significantly more as rates climbed sharply. 

Households are demonstrating unprecedented moral hazard. Sharply higher interest rates haven’t been able to tame credit growth anywhere near incomes. Part of this is fueled by the wide belief the central bank doesn’t have the discipline to hold rates higher. At the same time, lax regulation has demonstrated that Canada’s financial system is more afraid of seeing defaults than consumers.

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  • Hogsback 10 months ago

    I’m not seeing 198.5 anywhere on this table, which shows Q1 2023 debt to disposable income at 182.8.

    https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=3810023501

    Can someone tell me where that figure came from?

    • Jamie 9 months ago

      You’re looking at the wrong data set. That’s households and non-profits, seasonally adjusted. Unadjusted data for households checks out on Bloomberg.

      Sorry, not sure what the table number is for Stats Can but it was the first thing to come up when I looked. It’s also in the Statescan daily email.

  • Donna Majcan 9 months ago

    I would haphazard a guess that it is not the low interest fates that have caused the increase in household debt, but rather the extreme rising costs of day to day living expenses that have far exceeded the common wages. Until the balance of income and living expenses is realistic, not to mention attainable then, yes households will take to using credit to pay for groceries, heating, electric etc. It is no longer a question of living within your means when the means cannot meet the necessities.

  • Samir 9 months ago

    Canada CAN NOT and WILL NOT be stopped.

    #canadastimetoshine
    #becauseits2023

  • John 9 months ago

    Is Better Dwelling still going to appear on Google News after C18 goes into affect? Really hoping you guys are smarter than mainstream and avoid the “Canadian” label.

  • Yoroshiku 9 months ago

    My neighbour is a bigwig for one of the big banks. He told me 2 years ago that they had clients burning up to 65% of their income on mortgages. That’s bonkers.

  • Dan 9 months ago

    The Canadian economy is built on a house of cards (cheap credit) and bringing even more people each year to the country. This is as irresponsible as it can get and more the doings of banana countries. But hey, the people who already owned a property prior to 2018 are indulging in their superficial grandiose thoughts thinking they are millionaires now because their properties are worth over 1 million. They seem to fail to realize that so is everyone else’s! Meanwhile their kids are in their 30s and living in their basements and looking at 50 year mortgages to be able to own a piece of home ownership. Add to this longest waits in history in hospitals, health shortages across the industry, crowded classrooms and highways thanks to the millions of newcomers the govt brings in to try to keep the house of cards from crumbling down… We need to stop mass migration for 2 to 3 years in order to let the country, health sector, and economy catch up and go back to some sense of normalcy.

  • Chris McFetridge 9 months ago

    I really hate articles like this that carry the insinuation that Canadian households are financially irresponsible by “racking up so much debt”. And with headings like “Moral Hazard blah blah”.

    Here is a question for the author and editor: have you been paying attention to what is going on in our society since the start of the pandemic? Every single essential good that is controlled by oligopolistic companies has almost doubled in price: gasoline, heating oil, groceries, insurance premiums. The list goes on. Have incomes doubled? Nope.

    So, is it really any wonder that debt has spiraled out of control? If the Trudeau government had any moral sense or real political power, they would have passed legislation to stop these greedy companies from essentially profiting off the hardship of nearly every Canadian, just as the government did when profiteering was forbidden during the second World War. I don’t care what Galen Westin says about supply chains and cost increases, his companies have still profited at a time when everyone else is taking a hit. So are the banks. So are the oil companies.

    We are supposed to be a society, which means we share collectively in the good years and the bad. These companies had decades of good years to grow and profit. It was finally time for them to give a little of that up in the interests of the common good. But they refuse to do so. Not only have they refused, but they have used an international health crisis to further tighten the screws. Absolutely disgusting and soulless behavior.
    So, next time you feel tempted to write a piece chock full of statistics that essentially paints Canadians like a bunch of frivolous financial retards, maybe don’t.

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