Though Canadian household debt has not become a crisis or may not ever become a crisis, professionals expressed concern about the increasing household debt.
A former head of the Canada Mortgage and Housing Corporation warned on Canada’s rising debt problem, an issue that, according to him, has not been addressed.
Robert Kelly, who chaired the CMHC between 2013 to 2018, said in an interview that the speed in which Canadians are heaping up debt is alarming, but he did not dismiss the real estate situation in the country as a “bubble.”
“The reality is that Canadians have taken on a huge amount of household debt over the past two decades and I don’t mean that in just absolute terms, I also mean it in terms of comparing ourselves to other developed countries,” said Kelly, who now a board member of the Alberta Investment Management Corp.
Increasing household debt
According to Statistics Canada, the country’s household debt to disposable income ratio increased to 170.7 per cent in the third quarter of last year. In reality, Canadian households have owned an average of $1.71 for their every dollar of disposable income.
The Organisation for Economic Co-operation and Development (OECD)’s household debt tracker put that Canada’s figure well above its G7 peers at 186 per cent in 2019. This is above the U.S. rate of 105 per cent in 2018.
Kelly added that some Canadians are taking on larger mortgages to buy houses as an investment and that would make them much more vulnerable to a rise in mortgage rates.
What is obvious is that although household debt situation has not become a crisis, Canadians should take heed of how they spend their disposable income and it is always prudent to maintain a healthy household debt rate and should not make themselves vulnerable to possible mortgage price increase.
Household debt
As of the third quarter, Canadian households have to settle an average of $1.71 for every dollar of disposable income.
Statistics Canada said, household debt as a percentage of disposable income increased to 170.7 per cent, an increase from 162.8 per cent in the second quarter.
However, the ratio was still below the $1.81 seen in the fourth quarter of 2019.
Statistics Canada’s report said that while credit market debt increased by 1.6 per cent in the third quarter, household disposable incomes declined 3.1 per cent as Canadians regained lost jobs during the global pandemic.
Needless to say that lower income households had to pay more than their higher income counterparts, a higher debt to disposable income ratio.
Although the employment rate dramatically improved as the economy recovered from job losses and reached within 3.7 per cent of its pre-pandemic levels during the quarter, it was not enough to counterbalance the government support as employment insurance benefits plunged to almost 50 per cent in the quarter.
However, one of the indirect benefits of the successive lockdowns was that the household savings were keep at high during the quarter at $56.8 billion. That experienced a sharp decline from a record of $90.1 billion in the second quarter.
Households also generally benefited from rebounding mutual fund shares, while a 3.9 per cent return on the Toronto Stock Exchange over the three-month period. In general, the net worth of Canadian households increased three per cent to more than $12.3 trillion.
In April to June, household debt-to-income ratio decreased in all major Canadian metropolitan areas, which would have been a salutary feature indicating the general improvement of households ability to pay off debts. This was primarily due to the government support for income losses. This has, obviously, helped reduce non-mortgage debt during the period.
As employment losses, the mortgage part of the household debt increased in most metropolitan areas. As the second wave started, uncertainty reigned over households’ ability to continue serving their growing mortgage debt and this has a potential risk of increasing delinquencies on mortgages and other credit products.
What is obvious is that the booming real estate sector of Canada has not without its hidden risks and one could not afford to paint a rosy picture in this context.
