Thursday, January 5, 2017

Canadian debt-to-income ratio reaches record high

(December 17) In the third quarter of 2016 the Canadian household debt to income ratio rose to a record high as borrowing continues to increase faster than incomes.

According to Statistics Canada the ratio went up from 166.4 percent in the second quarter to 166.9 percent in the third. This means that for every dollar of income earned by a Canadian household almost 1.67 is owed in debt. However, Benjamin Reitzes, an economist at BMO Capital Markets said the half percentage point increase was actually below seasonal norms and the smallest increase in the third quarter since 2000. Reitzes thinks that the ratio could flatten somewhat in 2017 especially as in areas such as the Vancouver housing market has cooled, and restrictions on mortgage may slow down activity a bit in 2017. Statistics Canada reported that in the third quarter, adjusted disposable income increased by 1.0 percent while debt rose by 1.3 percent.
By the end of the third quarter total household market debt rose to a humongous $2.004 trillion. Mortgage debt was almost two thirds of this total amount. However, the debt service ratio decreased from 14.1 percent in the second quarter to 14.0 percent in the third. The ratio is of payment obligations as a proportion of disposable incomes. In spite of the increased debt the net worth of households rose 2.5 percent in the third quarter to $10.33 trillion caused mainly by a 3.2 percent rise in the value of shares, life insurance and pension assets. Other assets mostly real estate rose 1.2 percent.
Laura Cooper an economist at the Royal Bank noted that the household saving rate had also increased 5.8 percent in the quarter, the highest level since 2001 and a full percentage point above last quarter. However, she said that the higher debt to income ratio will convince the Bank of Canada to warn people about increasing household indebtedness.
An article in BNN by Pattie Lovett-Reid points out some of the reasons why household debt has been increasing and points out that a day of reckoning may be coming for many. A main factor in increasing debts is the very low interest rates available and enticing offers including no interest payments for some time. She notes that the high levels of debt are to a considerable extent among middle and high income earners. The debtors can manage their debt load as long as the status quo remains. However, if interest rates go up and the economy weakens they could be in trouble. This is a risk for the economy as well since as this group borrows less, demand will decrease and eventually production as well. If either interest rates increase, unemployment increases, or inflation strikes, these debtors may have problems still managing their debt. She thinks that measures of debt by income, age and region, such as are provided by the C.D. Howe Institute give you a more meaningful picture of the debt situation than just the household income to debt ratio. Lovett-Reid concludes: we need to take control of the variables that are within our power; spend less, save more, focus less on national headlines and more on our own household debt burdens. I believe we all have a willingness to repay our debt but I worry about our decreasing ability to repay the trillions of dollars we owe.
A recent Bank of Canada report flags rising home prices as a key factor in many Canadians entering the ranks of the highly indebted. In the third quarter almost half of those taking out mortgages in Toronto were considered highly indebted. Their loan to income ratio was over 450 percent. While Vancouver has seen a slowdown as the market becomes more expensive for foreign buyers still 4 in 10 taking out mortgages had loan to income ratios of over 450 percent. Stephen Poloz claimed that Ottawa's policy of tightening mortgage regulations will bear fruit over time.

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