credit and debt
03. credit & debt
An increasing amount of debt is one thing, an increasing cost to service it is another. How is Canada faring?
THE CANADIAN DEBT SERVICE RATIO IS STABLE
In the past year alone, the aggregate outstanding balance owed by Canadians to the big banks (for mortgages, car loans, HELOCs, etc) rose by $89.7 billion. Within this environment of rising debt, it is natural to become concerned about households’ ability to repay what they owe. As aggregate and average household debts have risen over the past three decades, they’ve done so in an environment of declining interest rates, reinforcing the fundamental tenet of economics that when the price of something drops, more of it is bought. In this case, debt is the thing that has become cheaper (via falling interest rates); ergo, Canadians have more of it. Certainly, this presents a medium-term risk to the Canadian economy, particularly should there be a downturn that precipitates a widespread inability to repay debt. That scenario notwithstanding, it’s reasonable to assume that as debt has grown over time it has eaten up more and more of
household budgets. The reality? Canadians currently spend 14.51% of their gross income on (all) debt servicing, which is 36% higher than the 10.64% that was spent in 1993 (a debt service ratio (DSR) low point over the past three decades). Having said that, the current DSR is 3% below the past-three- decade peak of 14.95%, achieved in 2008. Since then, the overall DSR has been stable and mostly flat. As part of this, the mortgage DSR has actually fallen over time, to only 7.22% most recently (though it should be said that over the past three years it increased by 13% as home prices ratcheted up). The key metric to watch here is the non- mortgage DSR, at least part of which reflects unsecured debt. This particular DSR has been on the rise since 1990, reaching 7.29% most recently, though it has fallen by 4% since reaching its peak a year ago. Further declines would be a welcome sight.
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