the rennie landscape - Q3 2019

credit and debt

03. credit & debt Rising interest rates in 2017/18 and increased credit consumption have pushed Canada’s debt service ratio back to its pre-recession peak. The good news is, relief is on the way.


Any references to the amount of debt being held by households or businesses needs to be framed within the context of the interest rate environment in which it is being serviced. With outstanding household debt at an all- time high in Canada, the implications for current and future economic growth would be unambiguously ruinous if the year was 1982 (remember when interest rates peaked in the low-20%s?). Of course, this is not 1982, it’s 2019, and interest rates remain near their historical lows. Having said that, as interest rates stopped falling and began their upward march over the past couple of years (after 8 years on the downslope), the total debt service ratio (DSR) in Canada—measured as the proportion of gross income diverted to debt repayments— has risen. In fact, the latest data show it reaching 14.88%—precisely equal to the past 30-year high attained in 2007.

While this is concerning, there are two reasons to view this data point with a level head. First, the bigger driver to the recently- rising DSR has been the mortgage DSR (which at 6.74% is only 2% below its three- decade peak of 6.89% from 1992) rather than the non-mortgage DSR (which comprises less economically-useful consumption-boosting debt and is 7% below its 2008 peak). There is some solace in that fact that households are most likely to service their mortgage debt above other types of debt, like car loans, credit cards, or unsecured lines of credit. Second, the outlook for interest rates has changed dramatically over the past year, with little risk that rates rise in the next 12 months and there being a considerable likelihood that they dip further from their current levels. Should this occur, Canadian households will have a little bit more money left over each month after servicing the debt on their past purchases.


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