Canadian households devote an astronomical amount of income just to carry their debt payments. Data from the Bank of International Settlements (BIS) shows Canadian households have a very high debt service ratio (DSR). The ratio dropped in Q4 2020 slightly, but it’s still much higher than any other G7 country. Not even the US housing bubble reached this level in 2008.
Canadians Spend 12.4% of Their Income On Debt Payments
Canadians spend an astronomical share of their income on debt payments. The household DSR reached 12.4% in Q4 2020, down from 13.5% in 2019. It dropped, but this was entirely due to the fact interest costs have fallen. Household credit growth is still booming, and at a much faster rate than income.
Canadian Debt Payments Dwarf The US… Even In 2008
Contrasting with our neighbors to the South, we can see their DSR isn’t even close to Canada. US households had a DSR of 7.6% in Q4 2020, down from 7.9% in the same quarter a year before. They spend a third less of their income on servicing debt.
The US wasn’t always this low, and did at one point spend much more on servicing debt. During the 2008 housing bubble, the DSR reached 11.1% before the financial crisis. Carrying higher debt loads makes households less flexible. In an emergency, this tends to amplify the shock. That’s why it’s common to see highly indebted households when doing an autopsy on a bad recession.
Canadian Households Spend The Most Income On Debt In The G7
No other G7 country has households so highly leveraged, and paying this much towards debt. The UK is in second place with a household DSR of 9.0% in the fourth quarter of 2020, about 27.4% lower than Canadians. Excluding Canada, the average DSR for the G7 is just 6.9% — nearly half the size. It might seem like not all that much, but compared to other economies of similar size, it’s huge.
Household Debt Service Ratios Across The G7
The share of income households devote to making the required payments on debt, across the G7
Source: BIS; Better Dwelling.
Households and policymakers perpetuate what’s happening in Canada is normal, but it’s not. Households spend almost double the share of income on debt payments in the G7. Most of the debt is due to non-productive investment in things like housing. It was tapped to create an economic boom over the past few years, but puts households in a highly vulnerable position. The costs of which are often shared by those without much debt.
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