Household debt climbs to 167% of disposable income

By Special to MoneySense on December 15, 2014
Estimated reading time: 2 minutes

Record high debt burden paired with record low interest payments

TORONTO – Canadian household debt hit a record high during the third quarter, as it grew at a faster pace than disposable income, according to the latest figures from Statistics Canada. The total amount of credit market debt — which includes mortgages, non-mortgage loans and consumer credit — held by Canadian households increased to 162.6 per cent of disposable income during the quarter, from a revised 161.5 per cent in the previous quarter. That means Canadians owed about $1.63 for every dollar of disposable income in the third quarter. The previous record of 161.7 per cent was set in the third quarter of 2013. RBC economist Laura Cooper said the high ratio of debt relative to net worth will reinforce the Bank of Canada’s cautious approach to raising its benchmark interest rate. “Consumers have amassed record levels of outstanding debt as a protracted period of depressed borrowing rates has sustained buoyant housing market activity,” Cooper said in a note. The bank’s overnight rate, which generally influences the interest rate charged by lenders for variable rate mortgages and lines of credit, has remained at one per cent for more than four years. Cooper noted that more timely data from the Bank of Canada suggests the accumulation of mortgage debt has settled into a more steady pace, although non-mortgage loans have picked up some of the slack. “Notably, the Bank of Canada perceives the risk of an unwinding of household imbalances as still low and against a strengthening economic backdrop is expected to raise the overnight rate in small, incremental hikes beginning in mid-2015,” Cooper said. “We anticipate that while outstanding credit balances will likely rise further, this will be accompanied by steady income gains, resulting in the debt-to-income ratio stabilizing, albeit at elevated levels in upcoming quarters.” During the quarter, households borrowed $27.4 billion, primarily mortgages. In total, Canadian households had $1,805 billion in credit market debt at the end of the third quarter — an increase of about 1.5 per cent. The increase was on par with the gain made during the previous quarter. Meanwhile, the debt service ratio — the amount of interest paid on mortgage and non-mortgage debt as a proportion of disposable income — declined to 6.8 per cent, an “all-time low,” according to Statistics Canada. Both the mortgage debt service ratio and the consumer credit debt service ratio edged down during the quarter. Household net worth climbed 1.3 per cent during the quarter, after a 2.2 per cent increase in the previous quarter. Household net work was $232,200 on a per capita basis.