OTTAWA – Canadian households are carrying the largest debt-to-income loads within the Group of Seven, the federal budget watchdog says – and that burden is likely to get even heavier.
Canadians have piled up the largest increase in debt-to-income within the G7 since 2000, based on a brand new report by the Parliamentary Budget Officer, released Tuesday.
In fact, in the third quarter of 2015, household debt reached 171 per cent of disposable income. Quite simply, for each $100 of disposable income, households had debt obligations of $171.
“This may be the highest level recorded since 1990,” the PBO said in its report, the very first through the government agency to concentrate on the household-debt issue.
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In December, Statistics Canada reported the household debt ratio for the third-quarter of 2015 had reached 163.7 percent. The PBO said their calculation doesn’t include pension entitlements as income, and that’s why their number differs.
The debt-to-income ratio could reach 174 per cent later this year, the PBO warned.
“Policymakers continue to express worry about the vulnerability of households to economic shocks, such as unexpected job loss or higher rates of interest,” it said.
“What matters more for financial vulnerability is not so much the level of your debt relative to income, but instead the capacity of homes to satisfy their debt service obligations.”
Financial vulnerability is generally measured by a household’s so-called debt service ratio (DSR), or even the degree of debt payments when compared with disposable income.
“Household debt servicing capacity will end up stretched further as interest rates rise to ‘normal’ levels over the next 5 years,” the PBO said, adding that after 2020, DSR – principal plus interest – is anticipated to rise to fifteen.9 per cent from 14.1 per cent of disposable income within the third quarter of 2015.
High amounts of household debt have raised because of near-record low interest rates, which have come in response to the Bank of Canada’s cuts to the trendsetting lending level appearing out of the 2008-09 recession in an effort to spur economic growth.
“Concerns about financial vulnerability are also particularly prominent in the current context because of the recent economic weakness and the expectation that interest rates will increase in the coming years using their historically-low levels,” the PBO said.
This has also stoked a warm housing industry, together with concerns that many Canadians could be getting into over their heads with cheap mortgages and face a financial crisis if the residential market starts to fall or when interest rates starts rising again.
“Consequently, it is useful to look at how households’ debt-servicing capacity may evolve because the Canadian economy recovers and rates of interest go back to ‘normal’ or neutral levels,” the PBO said.
The central bank’s key rate is now at 0.5 per cent after governor Stephen Poloz reduced the level twice last year in reaction towards the collapse of oil prices, which threw the nation into recession within the first half of 2015.
Poloz will announce the bank’s next rate decision on Wednesday. Many analysts believe there is a good chance of some other 25-basis-point decline in the important thing lending level.
The new study comes amid growing concerns that Canada’s record-high housing market – specifically in Vancouver and Toronto – could experience a major correction when the economy slows or, more seriously, heads back to recession.
“We just wanted to exhibit that there is a trajectory that is going up over time, which is something that people need to pay attention to,” Mostafa Askari, assistant Parliamentary Budget Officer, said in an interview.
“It is hard to believe that in another 5 years we won’t see an increase in interest rates,” he said.
“If interest rates don’t increase by then, which means the economy will probably be, actually, not so well.”
At the moment, Askari said the PBO has no plans to release future reports on household indebtedness.