Canadian household debt higher than previously estimated
Canada’s household debt figure relative to income is far higher than previously thought, according to Statistics Canada's historical revisions.
The debt to income ratio is a key measure in determining the economic vulnerability of households across Canada. A Statistics Canada analyst warned that the Canadian household debt to income ratio was well above that of the United States.
Revealed on Monday, the figures are mounting pressure on policy makers to address the issue. Household debt levels remain the number one domestic risk to the Canadian economy, said David Onyett-Jeffries, an economist with RBC Economics.
Other economists have expressed their concern about younger homeowners. “I’m more concerned about the newer crop of homeowners that have little equity in their property. If there’s a correction, their equity goes up in a puff of smoke and they’re underwater,” said David Madani, economist with Capital Economics.
The data agency indicated the ratio of household debt to disposable income hit 163.4% in the April-to-June period, a sharp increase from the upwardly revised 161.8% recorded in the first quarter (Q1). The original Q1 figure was 152%.
In Q2, Canadian household demand for credit-market debt rose 1.8% from Q1, due to increased appetite for mortgages and loans.
The rise in debt to income ratio has been attributed to three factors. The amount of credit market debt, such as mortgages and lines of credit, was revised higher under changes to the methodology. Disposable income was redefined, leading to a downward revision, and the balance sheets belonging to non-profit institutions, such as charities, were removed from the calculation.
The Bank of Canada has repeatedly warned that household debt is one of the most significant domestic risks to financial stability. Concerns over the mortgage market prompted Canadian Finance Minister Jim Flaherty to implement tougher rules regarding eligibility for home loans in July.
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