Another government organization is tattling on Canadian debt problems. The Parliamentary Budget Officer (PBO), the organization that provides independent financial analysis to the Canadian Parliament, released a report on household indebtedness. The report outlines how deep Canada’s household debt problem is, and is projecting it will get worse – fast.
Household Debt Increased
The PBO observed when household indebtedness increased. From 2002 to 2011, they note debt increased “sharply.” It then spun sideways until 2015, before slowly moving higher into 2017. To give some context, the ratio of household debt-to-disposable income jumped from 109% in 2002, to 162.34% by 2011. From there it “only” jumped to 169% by the first quarter of 2017. Most of the debt appears to have accumulated before and during the Great Recession. It quietly marched higher after that.
The PBO also believes it’s going to accelerate over the next year. They estimate this ratio will rise to 180% by the second quarter of 2018. If they’re right, debt would have to accelerate at the fastest pace in 27 years.
Source: Statistics Canada, PBO.
Debt Service Ratio To Hit All Time High
The household debt service ratio is also pretty high. As of the first quarter of 2017, Canadians have a debt service ratio of 14.2%. This basically means Canadians are devoting $14.20 to service debt for every $100 in disposable income they have. This is below the current record set in the fourth quarter of 2007, when it was at 14.9%. So Canadians have had it worse.
Source: Statistics Canada, PBO.
The accelerating debt the PBO is planning for, is expected to push the ratio to a level Canada has yet to see. In their words, “the financial vulnerability of the average Canadian household would rise to levels beyond historical experience.” They project the second quarter of 2018 will see Canadians match the 14.9% high set 10 years ago. As interest rates return to a “normal” of 3.0% by mid-2020, those with existing debt will see an increase in the cost of servicing it. By 2021, they’re projecting that the average debt service ratio will hit 16.3% – a level that’s never been tested before.
the financial vulnerability of the average Canadian household would rise to levels beyond historical experience.
— Parliamentary Budget Officer
The total amount of debt Canadians have isn’t nearly as important as their ability to service it. The higher the ratio of income devoted to servicing debt, the less they can afford to spend, save, and invest. If this debt was used to buy assets that can be sold, that’s great if the asset appreciates. If the asset depreciates, they’re throwing almost a fifth of their paycheck away.
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Shows how out of touch the Government of Canada is that they waited until now to sound the alarms.
what are you talking about?
Government figures at different points have said “hey Canadians, you should look at your debt to income ratio” for past two years. The reason why they said it is to raise awareness and financial responsibility, because economy could not support a rate raise.
Within the past two years, every major economic publication and analyst around the world has pointed to Canadian debt party and growing house bubble and said “yeah, you should be careful with that”.
Now that economic indicators have firmed up (although latest commodity slump may change that), BoC’s tone on rates has changed and there’s a high probability of rate raise(s) within next six months.
Government can be blamed for not raising rates, not shifting mortgage insurance risk onto banks. But no one forced ppl to borrow up to their gills.
Please include housing prices and the interest rate in the plots to show the correlation.
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