Canada borrowed debt so households didn’t have to, but they went ahead and borrowed anyway. Bank of Canada (BoC) data shows the share of highly indebted mortgage borrowers pushed to a new high in Q1 2022. These borrowers, with at least a 450% debt-to-income (DTI) ratio, now represent 1 in 4 mortgages. It sounds bad, but most of Canada’s debt is held by higher income households with substantial capital cushions.
Nearly 27% of Canadian Mortgage Borrowers Are Highly Indebted
Canadian mortgage borrowers are swimming in debt to buy real estate. Highly indebted households represent 26.7% of conventional mortgage originations in Q1 2022. This is down 1 point from the previous quarter and down 3.4 points from a year before. A conventional mortgage borrower has substantial equity, since they’re capped at 80% of the property’s value. As interest rates fell, these households levered up.
Canada’s Highly Indebted Borrowers Crushed The 2017 Record
The previous record for mortgage originations to highly indebted households looks tiny in hindsight. The share for conventional mortgage originations last peaked in Q3 2017, which is 6.9 points lower than the most recent record-smashing quarter. Record low rates and ripping inflation produced negative real borrowing costs. It’s a mystery why so many households binged on effectively “free” money.
More Canadian Households Are Highly Indebted, But It’s Not As Bad As It Sounds
Most household debt in Canada is mortgage related, pushing the BoC forecast higher. They estimate 18.7% of households are now highly indebted, including those without mortgages. It’s almost a 2 point climb from 2020 and nearly the same size as the previous 8 years combined.
However, the most interesting takeaway is the big jump after the Great Recession. The era of low rates was sold as a way for households to save. In reality, it sparked a huge borrowing binge almost immediately.
The tone feels ominous and was even presented that way as a systemic risk by the BoC, but it may not be that bad. People tend to picture low income households when they think of the highly indebted. In Canada, the top 40% of households held 71% of outstanding debt in 2019, the most recent data point. The reason is simple — lower income households don’t have access to as much credit.
Wealthier households can access and carry much more leverage, and have bigger cushions. It’s one of the reasons banks have programs to circumvent the stress test. It’s also one of the reasons investors became such a large share of home sales when rates fell.