Canadian debt-to-disposal income ratios are at an all-time high, according to the latest numbers released by Statistics Canada. The ratio was 167.2 per cent in the second quarter of this year, up from 165.2 per cent in the first three months of the year – and we can thank our housing prices for that. With interest rates remaining at record lows, Canadians continue to feel comfortable borrowing more to get into their dream house.
But are we seeing the full story when it comes to debt in Canada? At first glance, it may seem Canadian debt levels are out of control, but when this debt is compared to the value of assets that Canadians are holding, the numbers aren’t as scary. Yes, we are borrowing more, but our real estate values are also rising. This means our debt-to-asset ratios have remained virtually the same – sitting at about 16.9 per cent – since the early 1990s.
Here is what we’re hearing from Statistics Canada:
We are Borrowing More
There is no doubt that mortgage loans make up the lion’s share of Canadians’ debt. For example, total household credit-market debt reached $1.97-trillion in the second quarter, with $1.29-trillion in mortgages and $585.8-billion in credit cards, car loans and other personal loans. Most of the money we owe is for our homes, but with real estate value rising, that debt continues to represent a smaller portion of a ratio to assets – provided we don’t refinance.
“Canadians love debt and with interest rates this low, why wouldn’t they?” senior economist at TD, Leslie Preston writes. She points out that it’s not just an increase in household borrowing, but governments and businesses all saw larger debt burdens in the second quarter. This has been the trend since 2014, when the Bank of Canada cut interest rates to record low levels.
We are Worth More
Currently Canadian asset values are at $9.84-trillion – that’s about $271,300 per household. Canadians home prices have continued to climb and that has helped to keep debt-to-asset ratios lower. It’s also important to note that second quarter generally sees an uptick in mortgage loans, as more homes change hands in the April to June period than any other time of year. BMO Capital Markets has said the increase in the household debt ratio is consistent with the seasonal trend, as the second quarter is traditionally the strongest period for housing markets and mortgage debt growth.
We are Earning Less
The major reason our debt-to-disposal income is rising is because what we’re bringing home, on average, is not keeping pace with our debt. Debt has been rising at a normal pace.
“It may be somewhat reassuring to point out that at 5.5 per cent year over year, the pace of debt accumulation is well below its pre-recession pace. The trouble is, so is income growth,” says Preston. Basically, we are trying to buy more with the same income and that is stretching our rations to record levels.
Should We Keep Borrowing?
Depending on how you look at our debt situation, it may seem okay to keep borrowing, but this isn’t the healthiest way to fund your lifestyle. For every dollar of disposable income in Canada, there’s an average of $1.68 to pay back in debt.
A better approach is to pay down debt diligently. The less we spend and the more we pay back, the better we position ourselves for when rates finally rise again. In this low rate environment, high levels of debt can seem very manageable, but even a small increase could make monthly payments more difficult for Canadian families.
My best advice is to check out a mortgage payment calculator, and increase your interest rate by 200 basis points, or 2 percentage points. If you can afford payments at that level, then you have built in some security for higher borrowing costs. If you can’t, it’s time to make some make some major changes to spend less and pay down more debt.