Canadian households devote much more of their paychecks than their American counterparts. Actually, this is more of a global thing. Canada’s household debt service ratio (DSR) is manageable, but far from normal. An addiction to cheap credit and expensive housing has led to an epic borrowing spree. Households in the country now devote more of their income to paying off debt than any other country in the G7. Not by a little either — over 50% higher than any of its advanced economy peers.
Household Debt Service Ratios
The household debt service ratio (DSR) is the percent of disposable income used to pay for debt. Disposable income is what’s left over after mandatory transfers, like taxes. The higher the ratio, the more income is used to keep debt in good standing. The lower the ratio, the less income is used. Not at all rocket science, but we’ll be dealing with high flying numbers in a bit.
What’s less obvious is why high debt service ratios are bad. Lenders and members of state-leadership often say it’s not a big deal, as long as they can make the payments. A household’s ability to repay debt is only part of the issue though. The bigger one is the long term impact to the economy.
Simply put, debt is future income used today. People pull forward their consumption, and then pay for it plus interest. In the short run, it’s great for the economy. You’re not just getting what people can buy today, but the economy also enjoys their future income now. The issue is, that person needs to devote a regular stream of income to pay it off. Your human capital stock now has to cut back on spending in other parts of the economy. Plus interest.
Every point spent on maintaining debt is a point diverted from other areas of the economy. This leads to slower long-term economic growth, since less income is circulated locally. Poorly managed economies often double down, and try to get people to borrow more. Pulling more consumption forward works, until it no longer does.
When that day finally comes, you have people with bills to pay, and an anemic economy. Now try dealing with households that need to pay bills with low economic growth. It usually requires more debt, and going further down the hole. It’s not a pretty sight, and politicians often kick the can down the road until a systemic failure occurs.
Canadian Households Spend 12% of Income Servicing Debt
Canadian households no longer devote record income to servicing their debts. Unfortunately, it’s temporary due to the way numbers are crunched. The DSR is 12.6% for Q3 2020, down 7.4% compared to the same quarter a year before. It’s the lowest ratio since 2016, but this is largely due to the pandemic.
During the pandemic, Canada’s emergency benefits (e.g. CERB, etc.) replaced 2x income lost. This resulted in a temporary boost to disposable income, pushing the indicator lower. As the benefits fade, or qualifications tighten, the ratio will pop higher. The number reported by the country’s local statistics agency came in at 13.6% for Q4 2020. Q4 will be the first quarter where pandemic benefits saw criteria tighten. Not by much though.
Canadian Household Debt Service Ratio (DSR)The percent of disposable income households use to service debt in Canada and the United States. Source: National statistics, Better Dwelling.
Canadians Use 65% More Income To Carry Debt Than Americans
Canada’s DSR might only be mistaken for good, if it’s not contrasted with any other country. The US household DSR is 7.6% for Q3 2020, down 3.8% from the previous year. Canadians spend 65.8% more disposable income servicing debt than Americans. That’s a lot of future consumption borrowed to pump short-term economic growth in Canada.
G7 Household Debt Service Ratio (DSR)The percent of disposable income households use to service debt across the G7. Source: National statistics, Better Dwelling.
Canadians Devote The Most Income To Debt Servicing In The G7
Canada actually devotes more income to servicing debt than any other G7 country. The G7 average for DSR is 7.66% in Q3 2020, down 1.11% from the year before. On average, Canadians use 64.6% more income than their peers to maintain their debt loads. Even the G7 households with the second highest DSR, the UK at 8.9%, use 29.4% less income. Canadians also devote almost 3x the income of the lowest country — Italy. It’s actually wild to see these numbers in the context of countries considered at the same level.
Canadian Households Spend More Income Servicing Debt Than Other G7 CountriesHow much more Canadian households spend on debt servicing than households in other G7 advanced economies. Source: National statistics, Better Dwelling.
The narrative that Canadian debt service ratios are “not that bad,” lacks any context. Households devote a whole 5 points more to carrying debt, than any of their economic peers… just to continue having debt in good standing. Those are points removed from spending in the productive economy. When debt is this high, the only solution is to keep finding more ways to lend people money. At which point you’re less of a country, and more of a large lender with an army.
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I wonder what the healthcare argument is on that. lol
Spend $2 million for a house in Vancouver, because a $700k house in Seattle doesn’t come with healthcare at $2k/month. No wonder it looks like a retirement community, save a few of the polo shirt guys that love Vancouver because it has the best Earls.
Not even. Health insurance in Seattle is $400/person/month for a gold plan including partial drug coverage and a max out of pocket of $7,900.
No state income tax. Only Fed.
Let’s say you make $200k, and pay the monthly and almost die every year and have to pay $7,900 out of pocket.
– Taxes = $41,000 +
– Insurance = $4,800 + $7,900
– Total taxes and insurance = $53,700.
– Take home = $146,300
– Only income taxes
– Take home = $131,852
That’s not even accounting for the fact the pay is much higher in Seattle, and it’s unlikely to a pay the maximum. If you’re unemployed, they also have medicaid, so that narrative is also out the window too.
The Bank of Canada is nuts. This is healthy? Spending 50% more income to service debt? Older Canadians have no debt too, so this is just all stacked on Millennials and Gen Z.
Not just the younger generations. You forget that there is bank of mom and dad and reverse mortgages. For the first time in our history one of the major contributing segments to spending has a mortgage when it should be paid off. This is a double hit.
We wanted to be the first in the world in something and we are. We are the first indebted nation in the world. Thanks our brilliant government.
I’m not a smart man, but this seems bad. This is bad right?
Real bad. You get 65 cents of debt on every dollar you make. This will be heavily impacted rising global interest rate. The only way to recover the loss from chinese virus is to raise interest rate as flood of money were printed.
oops. actually 12 cents out of every dollar.
US remains DSR under 8% which is much better in its income distribution wise.
Well, if the pandemic lockdown and biggest unemployment crisis didn’t drop prices will printing lots of money buy all major economies lower prices?
No, they should have let prices drop during the pandemic.
Canadian govt. cant afford to correct the residential real estate market, whole economy is dependent on that. However, until govt. takes a step to normalize the real estate market a large part of the paycheque will go to service the debt instead of other areas of the economy. Why any company would want to start a business in Canada if they know people don’t have the buying power.
I think a lot of people ignore these numbers when they calculate our “free” Healthcare. Canada is just less affluent in general and in the midst of a serious economic malaise related to over indebtedness. I know so many people, myself included working 65+ hours a week and still struggling.
This can’t be right…12.6% of DISPOSABLE INCOME is used to service debt???
Even a miniscule $500k mortgage would burn $2300/mnth. If they had no other debts, they would need over $18k in DISPOSABLE INCOME per month to be at 12.6%DSR. Their actual income would be like $25-30k/mnth?
When did Canada become the new Monaco? It doesn’t sound right at all.
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