A word on the Canadian household debt-to-income ratio

By now I’m sure you’ve all heard that the Canadian household debt-to-income ratio has reached the same record levels seen in the U.S. prior to their housing collapse, but hold on a second.

Recall that this comparison of the Canadian debt-to-income ratio to its U.S. counterpart only began to appear in late 2012. That’s because prior to that the Canadian figure, while still high, looked a lot more reasonable by comparison. So what caused the big jump in the Canadian ratio in late 2012?

Simply put, Statistics Canada revised its methodology due to new international standards. You can read up on the details here and here.

There are a number of other reasons why the Canadian and U.S. measures were never perfectly comparable to begin with, but the point here is that as of that revision in late 2012 they’re not even close to comparable now, so not only are the doom and gloom media stories based on little more than a new calculation method, they are even less valid than before!

The U.S. will be revising their data along the same lines in 2014, which will no doubt result in a jump in their household debt-to-income ratio, at which point the Canadian figure will again look reasonable by comparison. In the meantime, Statistics Canada has made this attempt at reconciling the Canadian and U.S. figures.

Having said all that, the fact remains that the Canadian household debt-to-income ratio is still sitting at near-record levels, but this is not a new story. It’s been bouncing around current levels for more than a year now.

Measures like these do not magically revert to their long-run averages overnight. Change comes slowly, and policymakers know this. They’ve been hoping for the ratio to stabilize near current levels following more than a decade of strong growth, and that’s exactly what’s been happening.

In fact, it’s actually fallen on a quarter-over-quarter basis for two consecutive quarters now, which has only happened once before in the history of the data going back to 1990, and year-over-year growth is running at the lowest level in a decade. That’s one of the things Bank of Canada officials are referring to when they talk about the “constructive evolution of imbalances in the household sector.”

Moreover, the debt-to-income ratio is not the only measure we should be looking at when trying to gauge the financial health of Canadians. It’s obviously a story about rock-bottom interest rates, so we have to look not just at the level of debt, but also at Canadians’ ability to service the debt they have.

It’s something you won’t often read about, but Canadian households’ current debt loads are surprisingly affordable. Have a look at Statistics Canada’s debt service ratio, particularly the mortgage component (data available here). It’s currently about as low as it’s ever been, suggesting the majority of borrowers will have sufficient spare capacity to absorb higher interest rates down the road.

There’s no doubt that Canadians have borrowed more as interest rates have fallen, but households can comfortably manage the debt they have today. Absent an adverse shock, like a jump in interest rates or a spike in unemployment, there is little reason to expect tomorrow will be much different.

At the same time, Canadians seem to be getting the message about not borrowing too much in a low interest rate environment. With the first hike by the Bank of Canada still likely at least a year away, the Canadian household debt-to-income ratio is already falling and home prices are just keeping pace with inflation.

As our Director and Senior Economist, Housing Data and Market Analysis, Shaun Cathcart provides housing market intelligence to Boards, Associations, members, and real estate industry stakeholders. He spends much of his time analyzing and writing about Canadian housing trends. In his downtime, you can find him on his bike, on the volleyball court, and enjoying time with his family.


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