Canadian households now using 14.9% of income for debt payments

The average Canadian household was using a record 14.9 per cent of its disposable income to meet debt obligations, Statistics Canada said on Wednesday.

The measure was “just a whisker” below the record high reached at the end of 2017, noted BMO economist Priscilla Thiagamoorthy. And a growing share of Canadians’ income — 7.3 per cent, the most in nine years — is going toward interest charges, she added.

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Total debt repayments outpaced the growth of disposable income in the last three months of the year, StatsCan said. Between October and December, Canadians’ household debt reached a seasonally-adjusted average of $1.79 for every dollar of disposable income, up slightly from $1.78 in the June to September period.

Debt is eating up an increasing share of household disposable incomes even as Canadians pull back on borrowing. Although the end of 2018 saw a pick-up in mortgage loans, on an annual basis household borrowing declined 19.5 per cent in 2018 to the lowest level since 2014.

Rising debt-servicing costs will likely continue to squeeze Canadians’ wallets for the foreseeable future, RBC economist Josh Nye wrote in a note to clients.

Even if the Bank of Canada keeps rates on hold for the rest of the year, the share of income Canadians will have to devote to mandatory debt repayments will probably keep edging up as homeowners renew fixed-rate mortgages at higher interest rates, he added.

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Most Canadians will likely be able to manage higher borrowing costs by trimming consumption, according to Nye.

“We think the increase in debt servicing costs is more of a headwind to consumer spending than a financial stability risk,” he wrote.

But while most households will be able to keep up with higher interest payments, they’ll have a harder time making an actual dent in their debt. As a result, the debt-to-income ratio is likely to remain roughly stable, as it has been since the central bank began its rate-hiking, according to Nye.

“It will take a long period of household incomes outpacing credit growth to deliver meaningful improvement in the debt-to-income ratio,” he wrote. “We’re not seeing that yet.”

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Declining household net worth

StatsCan’s latest report on the health of Canada’s household finances delivered another piece of less-than-great news. Household net worth, the value of Canadians’ financial and non-financial assets minus liabilities, declined by a collective $304 million, or 2.8 per cent, during the last three months of last year. In dollar terms, it was the largest drop on record, Nye noted.

The drop was in part due to the financial market swoon of the last few months of 2018, which saw major indices in the U.S. and Canada log their biggest annual losses in a decade. But the decline was also the result of a cooler real estate market, with the value of residential real estate property dipping by 1.4 per cent, the weakest quarterly performance since 2008.

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Flatter housing prices means that real estate prices “won’t provide the wealth boost they have in recent years,” Nye said.

Meanwhile, he added, while stocks aren’t expected to repeat the sharp decline of late 2018, they’re also unlikely to replicate the generous gains of the last decade.

“On balance, we expect a much slower pace of household wealth creation going forward.”