Thursday 15 September 2016

Canadian household debt: onwards and upwards

StatsCanada reported this morning that the household debt-to-income ratio in Canada hit yet another all-time record high of 167.6 percent in the second quarter of the year.  This was almost 2.5 percentage points higher than in Q1, so the rate of deterioration in this already worrisome ratio actually seems to be accelerating.  It's small wonder that almost half of Canadian households now report they are living from paycheck to paycheck.  

line chart&8211;Chart2, from first quarter 1990 to second quarter 2016



But doesn't this graph, taken from the StatsCan release, suggest that the problem may not be that bad? After all, the debt-to-total assets ratio seems to have been falling for the past six or seven years, even as the debt-to-income ratio has mounted.  The main factor driving the positive trend in the debt-to-asset ratio has, of course,  been the steady rise in home prices, which has largely been driven by ultra low interest rates. 
Plenty of Canadians certainly take comfort from the fact that the value of their home is increasing, even as they struggle with their mortgage and other debt payments each month.  Are they right to do so?  Probably not.  The Bank of Canada may be more than a year away from raising interest rates, but as and when it does so, two things can be confidently predicted:  debt payments will become even more of a burden, especially for those paycheck-to-paycheck households; and house prices will stall and then reverse, resulting in a deterioration in the debt-to-asset ratio.
For most Canadian households, the family home is by far the largest asset.  When the market turns, liquidating that asset in order to service an intractable debt burden is unlikely to be easy. 

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