Canadian households have never been in a deeper economic hole. Canadians owe $167.60 for every $100 of disposable income — a number that keeps rising relentlessly.
The number was $84 in 1990, and hit a 1:1 ratio at $100 in 1997. At the end of March, it was $165.20.
Statistics Canada released numbers from the second quarter of 2016 today.
In total, household debt grew by $3.5 billion in the second quarter.
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About two-thirds of Canadian household debt is mortgage debt, StatCan said.
Total credit market debt hit $1.9 trillion by the end of June.
Uneasiness has risen along with Canadians’ debt levels in the past few years.
Low interest rates have spurred heavy borrowing, and with it real estate prices in some regions.
But that leaves Canadian households vulnerable to a rise in interest rates, a sharp correction to overheated real estate markets in the Greater Vancouver Area and south-central Ontario, or both. A lukewarm economy doesn’t help, either.
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In August, an RBC Economics report warned that “… the ongoing rise in outstanding debt balances leaves households increasingly vulnerable to an economic shock.”
While debt-to-asset ratios seem healthy, the report said, that depended on real estate prices staying high. Most families’ largest asset is a house, which is valued highly in a hot real estate market. Cool the market, and the ratio immediately looks scarier.
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“Concurrent increases in house prices and financial assets mask households’ increased exposure to a sharp correction in asset prices,” the report said.
A study released this week showed that 700,000 Canadians would have trouble meeting daily needs with the increase in monthly payments linked to a quarter-point rise in interest rates, and that rises to up to a million with a one percentage point increase.
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About seven million Canadian consumers carry a variable-rate mortgage or a line of credit with a variable interest rate.
In June, the Bank of Canada described rising household indebtedness and the housing market as “key financial system vulnerabilities.”
The greatest risk to the national economy involved a recession hitting heavily indebted households, and also causing a “broad-based correction in house prices,” the central bank warned.
“This chain of events would strain the financial system and the real economy.”
A rate increase driven by higher risk premiums was also flagged as a risk to the national economy.
In February, Bank of Canada deputy governor Lawrence Schembri urged both borrowers and lenders to be cautious and “take into account the impact of higher borrowing rates in the future on the cost of servicing mortgages and other loans.”
The central bank was concerned that homeowners hit by an interest rate shock would be forced to cut spending to a point where it hurt the overall economy, Schembri said.
The bank is alarmed by the rising number of “highly indebted households,” which it defined as having a debt-to-income ratio of more than 350 per cent. They tended to be young and live in B.C., Alberta or Ontario.
The number of highly indebted households doubled between 2007 and 2014.
In a recession, these households going underwater could damage the broader economy, Schembri said:
“If defaults rose quickly or if many households were forced to sell their homes, house prices could drop sharply across Canada, particularly in Vancouver and Toronto, which have recently experienced exceptionally strong price growth.”
“If such a decline in house prices occurred, the impact on the broader Canadian economy and the financial system would be large.“
— With files from The Canadian Press
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