Canadian debt

Photo: Quinn Dombrowski/Flickr

For every dollar of their disposable income, Canadians are now $1.63 in the red. Because disposable income didn’t see the same gains as debt levels in the third quarter, Statistics Canada is reporting the latest debt-to-income ratio among Canadians as 162.6 per cent.

Although the agency initially pegged the second quarter ratio at 163.6 per cent, that amount was revised to 161.5 percent and the stats dating back to the first quarter of 2011 were also revised (household mortgages had less value than originally thought). Those changes made the third quarter debt level the highest on record, after the original Q3-2013 record of 164.1 per cent was revised to 161.7 per cent.

Borrowing also increased in the third quarter with $27.4 billion loaned to Canadians, largely for mortgages. Mortgage debt rose to $1.171 billion, up 1.9 per cent, while consumer credit debt saw a 0.9 per cent uptick to $515 billion. Altogether, the total amount of household credit market debt – which includes consumer credit, mortgage, and non-mortgage loans – reached $1.805 billion, an increase of 1.5 per cent.

However, an analysis from the Bank of Montreal suggests “there’s little need to fret about households’ ability to carry all that debt.” BMO economist Benjamin Reitzes points to the household debt service ratio as a bright spot. The ratio, which is defined as household mortgage and non-mortgage interest paid as a proportion of disposable income, dropped to all-time low of 6.8 per cent in the third quarter.

Household net worth rose at a rate of 1.3 per cent, while non-financial assets were up by 1.8 per cent, thanks in large part to a boost in real estate values.

“Given the record debt ratio, there’s nothing here to change the Bank of Canada’s view that high household debt is a significant risk to financial stability,” said Reitzes. “However, the downward revision to the debt figures and continued strength in net worth should keep concerns from worsening.”

TD Economics’ predictions were a bit more subdued with economist Leslie Preston noting “the recent weakness in Canadian equity markets is likely to weigh on household wealth in Q4. More concerning in the rising level of household indebtedness after a period where it had seemed to plateau.”

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