credit and debt
03. credit & debt Canadians’ cost of servicing their debt is rising. Is there relief in sight?
WANNA BET? FALLING RATES BUT RISING DEBT
As a general rule, when the price of something falls, we buy more of it—and this applies no more or less to money. We do not often think of it in these terms, but the price of money is not the value indicated on the face of a coin or the front of a bill; instead, it is the rate of interest one is charged (charges) to borrow (lend) it. Viewed this way, it’s easy to understand why debt levels in Canada (and around the world) have been rising for so many years: quite simply, it is because the price of money has been falling. Amazingly (in this case spoken without the typical positive inflection associated with the word), interest rates continue to fall after seemingly having reached what felt most certainly like some sort of floor over the past couple of years. Of course, this has much to do with the persistence of economic uncertainty here in Canada and globally, which is incentivizing investors to seek safer “bets” such as government bonds. This is having the effect of pushing bond prices up and yields (interest rates) down.
This trend in falling rates will continue. The bigger question is: how much more debt will Canadians take on? This will determine whether current debt service ratios (DSRs, or the proportion of income devoted to principal repayments and interest payments) continue to increase as they have been for the past decade, or whether they will plateau (a decline is unlikely). Currently, Canada’s mortgage DSR is 6.75%, which is below its 1991 peak of 6.89%, but just barely. The non-mortgage DSR, at 8.23%, is only 6% below its 2007 peak, making the most recent total DSR of 14.96% an all-time high. We should care about trends in these measures because they hint at the potential risks associated with negative economic shocks and/or rising interest rates. In our current context the former is of relevance, while the latter is not.
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