Canadians $1.77 in debt for every dollar of disposable income

The "good news" is that debt is growing at a slower pace

Mario Toneguzzi is a Troy Media reporter based in CalgaryHousehold credit market debt as a proportion of household disposable income fell to 177.1 per cent in the second quarter of this year, the third consecutive quarterly decline, as income grew slightly faster than debt, according to a report released Friday by Statistics Canada.

“In other words, there was $1.77 in credit market debt for every dollar of household disposable income. Since the third quarter of 2018, household disposable income has increased 3.4 per cent, while household credit market debt has grown 2.8 per cent,” said the federal agency.

“The household sector’s net worth rose 1.2 per cent to $11,261.5 billion in the second quarter. This was partly the result of a 1.1 per cent increase in the value of non-financial assets. Residential real estate grew 0.9 per cent during the period, the second consecutive quarterly increase following two consecutive quarterly declines in the latter half of 2018.

“Financial assets rose 1.5 per cent in the second quarter after growing 3.8 per cent in the previous quarter, as domestic and foreign equity markets posted modest growth. Financial liabilities rose 1.6 per cent, the largest quarterly increase since the second quarter of 2017, as mortgage debt (+1.4 per cent) and consumer credit and non-mortgage debt (+1.9 per cent) grew. Consequently, the debt-to-asset ratio increased to 16.9 per cent.”

StatsCan said total credit market borrowing increased to $23.5 billion from $18.9 billion in the previous quarter. Demand for consumer credit and non-mortgage loans rose to $8.6 billion, while mortgage borrowing was $14.8 billion, it said.

“Credit market debt (consumer credit, and mortgage and non-mortgage loans) totalled $2,251.7 billion in the second quarter. Mortgage debt totalled $1,468.8 billion, while consumer credit and non-mortgage loans stood at $782.9 billion,” explained the agency.

“The household debt service ratio, measured as total obligated payments of principal and interest on credit market debt as a proportion of household disposable income, edged up to 14.93 per cent in the second quarter, as growth in total obligated debt payments (+1.8 per cent) slightly outpaced growth in disposable income (+1.4 per cent). As a result of higher interest costs, the gap between mortgage interest payments and mortgage principal payments continued to widen, a trend that began in 2017.”

Brian DePratto, Senior Economist with TD Economics
Brian DePratto
Senior Economist with TD Economics

Brian DePratto, Senior Economist with TD Economics, said maintaining the level of debt “got just a tiny bit more challenging. The debt service ratio stood at 14.93 per cent of disposable income in the second quarter, up from 14.87%, setting a new all-time high. The slight uptick was due to rising interest costs across the major borrowing categories.”

“The strength in real estate activity of late was reflected in today’s data. Mortgage debt growth ticked back above the one per cent quarter-on-quarter mark for the first time since late 2017, consistent with housing markets beginning to find their footing. While falling borrowing costs likely helped demand for housing, they haven’t translated fully into servicing costs, which rose just a bit higher in the second quarter to break through the record last set in late-2007. However, this uptrend is unlikely to persist much longer given five year bond yields and mortgage rates that are back at or below five-year-ago levels,” said DePratto in a commentary note.

“All told, the recent theme of a “goldilocks” convergence of income and credit growth held in the second quarter, resulting in a third quarterly drop in the household debt-to-income ratio. With healthy income gains playing off against lower borrowing costs, this theme appears set to continue.”

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