This, despite still ultra-low interest rates and the highest disposable income ever.
Canadian households are known around the world for their uncanny ability to pile on debt. And American debt slaves, who’d gotten trampled during the Great Recession, turn out to be lackadaisical these days in comparison.
The share of disposable income (total incomes from all sources minus taxes) that Canadian households spent on making principal and interest payments on their ballooning mortgage debts and non-mortgage debts reached a new record of 14.9% in the first quarter, despite still ultra-low interest rates and despite the highest disposable income ever, according to data released today by Statistics Canada:
The plunge in the debt-service ratio in 2008 and 2009 was a function of plunging interest rates. In Canada, most mortgages are variable-rate mortgages or adjustable-rate mortgages, and the lower interest rates turned into lower mortgage payments without having to refinance the mortgage.
These lower interest rates allowed households to spend more on home purchases, and home prices ballooned, creating some of the world’s biggest housing bubbles in certain markets, particularly in the Vancouver and Toronto metros.
The two main components of household debts are mortgage debts and non-mortgage debts (such as auto loans, credit cards, and personal loans). Mortgages in Canada are mostly variable-rate or adjustable-rate, and as such have far lower interest rates than other consumer loans, with credit-card debt counting among the most expensive debt. But not all households are homeowners, and with mortgage rates being low, debt service across the nation is lower for mortgage debts than for non-mortgage debts.
The percentage of disposable income spent on servicing mortgage debt has ticked up to 6.7% (blue line); and the percentage spent on servicing non-mortgage debts (credit cards, auto loans, etc.) has risen more sharply recently to 8.2% (red line):
Total consumer debts rose 3.7% in the first quarter, compared to Q1 a year ago, to a record of C$2.23 trillion. This includes C$1.45 trillion in mortgage debts (+3.3%), C$662 billion in consumer credit (+4.4%), and C$114 billion in non-mortgage loans (+5.6%).
So how do Canadian debt slaves stack up against American debt slaves? Statistics Canada released a report on just this topic at the end of March perhaps because authorities in Canada should get a tad nervous. StatCan:
Levels of household indebtedness in Canada have also garnered much attention in recent years, in part because household spending has been a consistent source of economic growth, compared with less-even contributions to growth from investment spending and exports. The gradual onset of higher borrowing costs since mid-2017 coupled with increased house prices has brought about a renewed focus on the ability of households to manage their existing debt liabilities, particularly in view of slower wage growth.
The annualized data it provided included the household debt-to-disposable income ratios for Canada and for the US through 2018. The ratio shows how large debt is relative to disposable income. For Canada, this ratio was 175% annualized in 2018, one of the highest in the world, and rising. For the US, it was 103%, and declining:
Canada’s household debts have continued to surge since the year 2000 except for a brief dip during the Financial Crisis. But US household debts plunged during years of deleveraging after the Financial Crisis, in part by consumers defaulting on their mortgages and credit cards. Household debts didn’t start growing again until 2013. And it took until 2017 before they surpassed the pre-Financial Crisis peak.
But over the decade since the Financial Crisis, the US population has grown, and the number of working people has grown, and the national disposable income has increased, and so the ratio of household debt to disposable income has continued to drop.
High household indebtedness (leverage) was in part what triggered the mortgage crisis in the US which contributed to the Financial Crisis.
Canada is now in a similar situation as the US was before the Financial Crisis, only household leverage is a lot worse. In addition, the dizzying household leverage in Canada at some point becomes a drag on consumer spending as households have to divert too much of their disposable income to debt service and have less left over to spend on goods and services.