Canadian households owe more than ever before, with the biggest burden being mortgage debt, and this is expected to worsen by the end of next year, according to a new report from the Parliamentary Budget Officer (PBO).
Both the amount owed by Canadian households and the cost of servicing this debt are expected to grow over the next few year, according to the report; this will push the average household’s financial vulnerability “to levels beyond historical experience.”
“Policymakers continue to express concern about the vulnerability of households to adverse economic shocks, such as unexpected job loss or higher-than-expected interest rates,” the PBO said in its report.
Mortgage debt has grown despite the fact that the household borrowing rate, calculated using a weighted average of mortgage and consumer interest rates, has fallen in the past 15 years. The growth in this type of debt occurred because house prices have surged, causing overall mortgage burdens to balloon. Mortgage debt has increased 11% since mid-2015 and now accounts for 65% of all household debt. As interest rates increase, households’ ability to service this debt will be stretched even further.
The average household’s debt service ratio (DSR) is 14.2%, which means that in order to service their debt, households are paying $14.20 in debt payments for every $100 in disposable income. This is forecast to jump over the next few years; by 2021, the DSR is expected to be 16.3% - more than three percentage points higher than the long-term historical average of 12.9%. It is also 1½ percentage points higher than the highest level ever recorded, which was 14.9% in 2007.
On average, Canadian households owe $174 dollars for every $100 of disposable income; according to the PBO, this is the highest level recorded since early 1990 when households owed $90 for every $100 of disposable income. By the end of next year, this is expected to grow to $180 – double the $90 recorded 27 years ago – but the DSR is a better measure of financial vulnerability, according to the report, because households are not required to pay off all their debt in a given year.
“What matters more for financial vulnerability is not so much the level of their debt relative to disposable income, but rather the capacity of households to meet their debt service obligations,” the report said.
“Concerns about household financial vulnerability are also prominent given the expectation that interest rates will rise from their historically low levels.”
@EmmaHampelBIV
