Canadians from British Columbia to Nova Scotia are facing a personal debt crisis. In a low-rate environment and a weak national economy, Canadians are taking on too much debt, and the levels are nearing record highs.
According to new data from Statistics Canada, the debt-to-income ratio in the first quarter of 2016 was 165.3 percent. Simply put: households are $1.65 in debt for every dollar of disposable income. This is close to the 165.4 record high at the end of last year.
The net worth of Canadians declined 1.5 percent to $7.47 trillion.
Despite the mild decline in the debt-to-income ratio, economists are warning to take it with a grain of salt.
“Don’t let the improvement fool you though, as the ratio usually falls in the first quarter, and the 13 basis-point decline is the smallest Q1 drop in seven years,” said Benjamin Reitzes, senior economist and director of economic research at BMO Capital Markets, in a research note to investors. “The persistent strength in the country’s two biggest housing markets, Vancouver and Toronto—more generally B.C. and Ontario—are driving continued debt buildup.”
Why are Canadians in so much debt? They’re taking on more mortgage debt – Canada’s housing market is skyrocketing, particularly in Vancouver, Toronto, Ottawa and Montreal.
Household mortgage credit spiked 6.5 percent year-over-year, while consumers increased their other debts by three percent.
The new data could prompt policymakers at the Bank of Canada (BoC) to curb borrowing and cool down the overheated real estate market by raising interest rates. But with the way Canada’s economy is performing and how the global oil market is being contained, a rate hike is unlikely to happen.
Last week, the BoC highlighted how vulnerable households are by soaring household debt.
“Mortgage debt continues to rise among highly indebted households that have less capacity to cope financially with a loss in income or rising interest rates. This leaves the household sector more vulnerable, with potential consequences for lenders and mortgage insurers,” the central bank said in its financial-system review.
With a selfie-obsessed prime minister, an inept BoC governor and an indebted populace, who knows where the nation’s economy is heading?
In July 2015 U.S. consumer debt to income level was 370%.
I think Canada is doing much better than the U.S. The big problem I see is the high level of unsecured credit card debt.
If we were to have a real bad recession or depression, credit card payments will be the first bills that will go unpaid. I cannot believe the level of credit card debt Banks are willing to let consumers rack up.