Canadian Household Debt Ratio Hits Another Record
Canadians, influenced by near-zero interest rates, have broken the previous record when it comes to borrowing, as households now owe more than their disposable income.
The ratio of household credit market debt to disposable income rose from 165.2% in the first quarter of the year to 167.6% in the second quarter, according to Statistics Canada.
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That means households held $1.68 in credit market debt for every dollar of disposable income, Statistics Canada said. (Source: “National balance sheet and financial flow accounts, second quarter 2016,” Statistics Canada, September 15, 2016).
Canadians’ borrowing spree is one of the main concerns of policymakers as the central bank’s loose monetary policy, in place since 2008, has helped fuel real estate prices in the country’s largest cities.
Real estate prices in the Greater Vancouver Area climbed close to 30% this summer before the local government imposed a 15% tax on foreigners purchasing local property.
In the second quarter, the aggregate level of debt owed by Canadians has exceeded the country’s gross domestic product (GDP) for the first time ever. Canadians’ debt is now 100.5% of its GDP, up from 98.7% in the previous quarter. (Source: “Canada’s household debt is now bigger than its GDP, for the first time,” Financial Post, September 15, 2016.)
Total household credit market debt, which includes consumer credit and mortgage and non-mortgage loans, soared to $1.973 billion at the end of the second quarter. Mortgage debt took the largest share of borrowing with $1.293 billion, or 65.6% of total credit. (Source: Statistics Canada, September 15, 2016, op cit.)
Higher indebtedness of Canadians is also a concern for the central bank because more consumer borrowing hasn’t been matched by an increase in wages.
A two-percent increase in household credit market debt from the previous quarter surpassed the below-average growth of 0.5% in disposable income in the second quarter. (Source: Ibid.)
Canada’s rising household debt level has also caught the attention of the International Monetary Fund, the “last resort” international lender, which has warned that any negative shock to the economy could lead to consumers finding it difficult to service their debt.
Canada’s economy is currently going through a soft patch after a plunge in commodity prices, especially crude oil and natural gas, which account for a major portion of the country’s exports.
