Canadian households briefly saw their debt issue shrink, but those days are long gone. According to Statistics Canada (Stat Can), the household debt to income ratio hit 186.23% in Q4 2021. The ratio had improved briefly as stores were closed and households paid down a little debt. The most recent update was massive though, reversing any progress made as it pushed to a record high.
Canadian Households Are Carrying A Record Share of Debt
The debt to income ratio reached a new all-time high and did so with a monster move. The ratio came in at 186.3% in Q4 2021, meaning households owed $1.86 for every $1 of disposable income earned. It’s an increase of 6 points from the previous quarter and it’s up 9 points from last year. More than half of the deterioration was over a single quarter.
Canadian Household Debt To Income
The ratio of Canadian household market credit to disposable income.
Source: Stat Can; Better Dwelling.
Canada Has Seen Household Debt Rise and Incomes Fall
Stat Can attributed the ratio to rising debt and falling household incomes. Household debt rose 1.9% in Q4 2021, while disposable income dropped 1.3% over the same period. Initial public health measures left households with a little extra cash. Some households had reduced their credit while they were locked at home. It only lasted a few months before low rates enticed people to binge on the cheapest cash in history.
Canada’s Debt Problems Are Bigger Than They Appear
If it’s one of the first times you’ve ever seen the ratio, it might not seem that high. It’s important to remember this is an average used at the national level. Every household with little to no debt weighs the index lower for those with more debt. There are other indicators, like 1 in 5 new mortgages are to highly indebted households, that reveal the situation is worse.
Stat Can suggested it might not be as bad as it sounds due to the large amounts of home equity gained. That’s somewhat problematic when home prices are moving so fast. One bank recently suggested the market has “exaggerated” the value of housing. Consequently, they don’t consider the value of homes to be a reliable indicator at this point. The reduction of economic activity due to rising rates and high debt loads, or low rates and high inflation? Now that’s real.