Canada’s most expensive real estate markets are the most vulnerable to rate shock. Surprising, we know. Canada Mortgage and Housing Corporation (CMHC), using Equifax data, crunched the Q2 2018 numbers for debt to income ratios across Canada. The numbers show cities with the most expensive homes also have the highest DTI ratios. The high levels of debt relative to income make these cities more vulnerable to rising rates.
Debt To Income Ratios
A debt to income (DTI) ratio is, well… the ratio of debt a household has, compared to the disposable income they earn. Ratios increase when households acquire debt faster than their incomes can grow. The ratio decreases when households deleverage or income grows faster than debt. Ideally, you want to see a strong economy with relatively low DTIs. However, a high DTI by itself isn’t a problem.
Afterall, if the household is making payments and defaults are low, who cares? The problem is when this debt is accumulated at relative lows for borrowing rates. High debt loads at low rates might be manageable today, but as servicing costs rise, they may not be. As rates rise, those with higher ratios are likely to see their service costs rise to unmanageable levels. When households are hit with unmanageable debt, they do things like default or sell assets at a loss. Remember, defaults are a lagging indicator, not a leading indicator.
Toronto and Vancouver Have The Highest Ratios
The highest DTI ratios in Canada were in Vancouver, Toronto, and Victoria. Vancouver households had a ratio of 242% in Q2 2018, up from 226% three years ago. Toronto’s ratio reached a lower (but still high!) 208%, up from 189% over the same period. Victoria trailed closer to the national average with 189%, the same level it was three years ago. To contrast, Canada has a ratio of 171%, up from 165% three years ago.
Debt To Income Ratios For Canadian Cities
The ratio of household debt to disposable income, in major Canadian cities.
Source: Equifax, Statistics Canada, Conference Board of Canada, CMHC calculations, Better Dwelling.
Smaller Canadian Cities Have The Lowest Ratios
Smaller Canadian cities had the lowest ratios in the study, with Saint John, Sherbook, and Sudbury at the bottom of the list. Saint John saw their DTI ratio fall to 106% in Q2 2018, down from 112% three years ago. Sherbrook was the second lowest with a DTI ratio of 132%, down from 139% three years ago. Sudbury was the third lowest with a DTI ratio of 133%, up from 131% three years ago. Yes, even Canada’s lowest debt ratios are above 100%. For context, the US has a debt to income ratio of 109% for the whole country.
Canada’s massive real estate price boom, fueled by cheap debt has grown to epic levels. Canadian households are the most indebted in the world. That gets even worse in larger cities, the major economic engines of the country.
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