Canadian household debt burden rising again

One unexpected consequence of the COVID pandemic was a sharp decline in the household debt burden in Canada. Data from Statistics Canada revealed that the debt-to-disposable income ratio fell from a peak of 1.81 in the final quarter of 2019 to 1.63 in the second quarter of this year. The decline reflected the income supports provided by government as well as reduced spending amid restrictions and lockdowns. Repayment deferrals offered by financial institutions lowered the debt service burden and facilitated a record increase in household savings.

That was then; now, the debt situation seems to be heading back towards the pre-pandemic "norm". StatsCan reported this morning that the household debt-to-income ratio rose to 1.71 in the third quarter of the year.   The housing market has proved remarkably resilient in the face of the pandemic, and mortgage borrowing set new highs in both Q2 and Q3. Moreover, disposable income fell 3.1 percent in the quarter as government income support dropped, although income remained 9.2 percent higher than in the fourth quarter of 2019.  The household savings rate fell from the record 27.5 percent posted in Q2 to 14.6 percent in Q3, still very high by historical standards. The debt service ratio edged up from 12.4 percent in Q2 to 13.2 percent in Q3, as payment deferral schemes wound gradually wound down. 

Can we square these numbers with Finance Minister Chrystia Freeland's recent suggestion (see December 9 post) that unspent income support payments constitute "pre-loaded stimulus" as the economy moves toward a post-pandemic recovery?  StatsCan notes that household sector saving stood at C$ 56.8 billion in Q3, a sharp decline from the record $ 90.1 billion in Q2 but still very strong by historical standards. Household net worth increased 3 percent in Q3 after a 5.3 percent gain in Q2, largely reflecting the remarkable resilience of equity markets. 

This does appear to suggest that households will be in a position to help Canada spend its way out of the COVID downturn, as Ms Freeland evidently hopes. Not all households, however: it is worth quoting in full this caveat from today's StatsCan report: Household debt is aggregated across all income brackets; however, in general, credit market debt to disposable income tends to be higher for lower income quintiles. No surprise there, but it's an important point for policymakers to keep in mind.