Canadians are starting to feel the impact of their debt-driven spending spree. Statistics Canada (StatsCan) numbers show the debt service ratio reached a multi-month high. In Q2 2018, Canadians spent the most servicing debt since 2008. Mortgage debt was the big news though, as households spend the most since 1993 to stay afloat.
Debt Service Ratio
The debt service ratio (DSR) is the percent of disposable income used for regular loan payments. Disposable income is the money left over, after taxes and “non-discretionary” spending. Since paying debt down is basically paying for something you’ve already bought, the higher the DSR, the slower the future growth. Less disposable income means less future spending – kind of important for economic growth.
Canadians Now Use The Most Income To Service Debt Since 2008
The amount of income used to service total debt reached a multi-year high. Canadians had a DSR of 14.15% in Q2 2018, up 2.68% from the same quarter last year. The DSR of just the interest on that debt is 6.87% in Q2 2018, up 7.84% from the year before. That works out to $92 billion of income just going to interest payments in the quarter. Most of the increase is due to the rise in interest rates.
Canadian Debt Service Ratio
The ratio of disposable income Canadian households used to service debt by quarter.
Source: Statistics Canada, Better Dwelling.
Canadians Pay The Most For Mortgage DSR Since 1993
Breaking down just mortgages, we get a high Canadians haven’t seen in decades. The mortgage DSR was 6.51% in Q2 2018, up 3.33% from the year before. Mortgage interest alone had a DSR of 3.55%, up 8.89% from last year. The amount spent on mortgage interest in the quarter reached a whopping $47 billion. Once again, a good portion of the increase here is due to rising interest rates.
Canadian Mortgage Debt Service Ratio
The ratio of disposable income Canadian households used to service mortgage debt by quarter.
Source: Statistics Canada, Better Dwelling.
The fact that the majority of this debt is mortgage related is semi-good news. The principal paid on mortgage debt is retained as equity, which helps build wealth. However, that cash is still being removed from consumer spending and productive investments. That’s going to be a drag on the economy, that gets worse as rates continue to rise. Ironically, a slow economy reduces asset values, diminishing equity built with principal.
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We’re screwed.
What a beauty of a setup. It’s like a Chinese finger trap. The better the economy does, the more interest rates will rise, choking off disposable income. If it goes worse, there goes the value of those expensive homes everyone owes debt on. Truly a remarkable setup from our government.
Just so you know, it was many different government failures. It’s a failure so grand, many governments had to be involved.
Definitely. The Conservative Federal minority govts did most of the damage with the Majority govt lowering interest rates to try to stave off the damage of the 2008 global financial crash but….
We just have to pay for it later, and at a much higher price
Slight clarification: the BoC acts independent of the government. It is incorrect to suggest ‘the government’ did anything. If someone at Services Canada spits in your face, you can’t blame ‘the government’. just because it is a public institution. It won’t matter. Baby T will be out. I won’t shed a tear but the populist garbage we’ll be living with is going to be soul sucking. Stevie may make a comeback. Time for darkness. BD4L.
The difference this time around is the stunning lack of alternatives if things go sour. In 1980 and 1992 there were tons of places to rent affordably as a place to live if you lost your home. Today, not so.
Debt service was the same in 1992 but the mortgage rate was 11.5% …….Ouch!
So with interest rates at 2.5 to 3 % now, what happens to the Debt Service Ratio when interest rates go up to 5 % in 2 years??? I predict a Debt Service Ratio around 20 to 25 % in 2020 or 2021 which will be when Foreclosures in Canada will be at US levels in 2009.
This is a detail most miss out on. We can no longer lower interest rates which would ease DSR. The only thing that can come down to ease the pressure are the asset prices, which will leave a lot of people in a tight spot.
This observations seems to fall under the category that “you cannot have your cake and eat it too.” You cannot have artificially high housing costs without diverting considerable portion of disposable income to mortgage payments. The thought that one can solve the problem by transferring credit card debt to second mortgages was discussed recent in Better Dwellings.
While Canada is very nice compared to places like Los Angeles which is mired in corruptionism, the mathematics of the New Urbanism result in these type of economic problems where a disproportionate part of disposable income is wasted on unduly high housing costs.
I think both N.A. and western Europe will be experiencing a major shift to deurbanization in the next decade or so as aging baby boomers find it increasingly more difficult and undesirable to live in expensive urban centers and continued technological advancements and connectivity as well as a shift in employment practices facilitate more and more Generation Xers and Millennials to work “remotely”, eliminating the need for them to remain in expensive, busy, stressful and polluted urban centers.
I´m already seeing this shift happening on a grand scale in Costa Blanca in Spain… 5-6 years ago, it was mostly pensioners who were buying property here for retirement. Now, there´s a lot of X’ers that are selling their overpriced properties, mostly in Northern Europe and settling down here long before their golden years.
All of our 4 neighbors (and us) belong to this group… one from London, one from Stuttgart, one from Amsterdam and interestingly enough even one from Valencia just an hour away. The appeal of a less expensive and more tranquil lifestyle while you´re just an hour away from a major urban center for business, arts, sports and culture, if needed at half to 1/4 of the cost pretty much make the move a no-brainer.
Our other neighbor in another property is in his late 30´s and just made the move here from Madrid which is experiencing the same RE trajectory that T.O. was experiencing in the early parts of this decade. IMHO this is all the result of a currently subdued but nonetheless fundamental spiritual shift in the population away from the wealth generation aspects of capitalism that has driven our societies for the past few decades into a less materialistic consciousness if you will.
BTW a good article on this topic was on the Star yesterday… 80% of Toronto Voters feel Toronto has become unaffordable (that was from a couple of weeks ago) and 90% of those think it´s because of housing and related expenses (i.e. property taxes, utilities, etc.). Those are pretty big numbers if you think about it.
I could see a 0.5 point raise coming up next month in one shot!
Inflation is going up and USA have already raised close to twice as many times as us. We are late on our rate normalization.
We are forced to follow USA direction, no choice, its always been that way. American NAFTA negotiators will not accept a low C$ (by keeping our rates low) as it gives us an unfair trade advantage.
Does anyone know when the bubble will pop?
What bubble? This is all normal. Tick tock. BD4L.
Its already happening in BC. Can’t speak for the rest of Canada.
Things have slowed everywhere for about 6 months and finally house prices are dropping 2.5-5 percent. Small because people still believe in the bubble but by next March….you’ll see some major drops and/or foreclosures begin.
Sorry to say the rise in property values was totally driven by greed, putting housing out of the reach of most people. The old saying, what goes up must come down.
Really? BC? there’s a housing issue in the West? How could the epicenter of smart money, transparent lending practices and reasonable asset appreciation have any sort of bubble? You’re insane. BD4L.
“Ironically, a slow economy reduces asset values, diminishing equity built with principal”
Love that poetic phrase.
Something like “automatic stabilizer”, called out by classical school.
I really don’t see the house bubble popping save some world-economic/war turbulence. We will probably see a slow 10 year decline, like we had in 1993. Such bullshit for so many young families or people saving for property.
Got our politicians to thank for prostituting our most valuable cities to the highest bidder