Canadian households are some of the most indebted in the world, with payments to match. Bank for International Settlements (BIS) data shows household debt service ratio (DSR) in Q2 2021. The DSR is the share of disposable income used for debt repayment, in aggregate. Canadians spend more than a tenth of their income repaying this debt, more than the US at its peak. No other G7 advanced economy even comes close to what’s happening in Canada.
Canadians Spend Over 1 In 10 Dollars Earned On Repaying Debt
Canadian households dedicate a huge share of their income to debt repayment. The household DSR for the country was 12.4% in Q2 2021, up from 12.1% in the previous quarter. Over 1 in 10 dollars households make is to repay previous economic growth. A lot of future productivity has been used for a short-term boost to the economy. It isn’t clear how unusual this is until you look at other countries.
Canadians Spend 65% More of Their Income On Debt Payments Than Americans
South of Canada’s border, Americans have been known to dabble with high household debt. The DSR was 7.5% in Q2 2021, up from 7.4% in the previous quarter. Households spending $7.50 for every $100 they take home after taxes is already high. Canadians dedicate 65.3% more.
Even the US at the peak of its notorious housing bubble, fails to meet Canada these days. At the peak of the housing bubble in 2007, US households had a DSR of 11.6% — almost a whole point under Canada. Officials in Canada often write this off as a problem due to falling interest rates. Since 2007, the US Federal Funds rate has dropped 98%, and its household DSR improved. It’s not entirely due to low rates. Low rates just facilitate exuberant behavior.
Canadian Debt Payments Consume The Most Income of Any Country
Canada’s household debt is high compared to any advanced economy, not just the US. The second-highest household DSR in the G7 is the UK at 8.8%, with Canada 40.9% higher. For context, UK households are in a “debt crisis” with payments at this level. Households in most G7 countries carry substantial debt, but nothing like Canada. Even with the DSR dropping in the country.
G7 Household Debt Service Ratio
The required share of disposable income an average household dedicates to making payments on their debt, across the G7.
Source: Bank for International Settlements; Better Dwelling.
Speaking of that drop in Canada, it’s not entirely what it seems. You might have noticed a significant drop in DSR after the pandemic hit. It makes it look like households paid off a whack of debt, but that’s not really the case. Debt repayment increased, but the drop is primarily due to generous pandemic benefits.
Household DSR is an aggregate, meaning it’s only compared at a national level. At the start of the pandemic, Canada replaced every $1 of income lost with $2 in benefits. Doing this helps to boost disposable income. Low income households, that typically don’t have much debt, saw their ratio improve. At the same time, Canada’s bank regulator warns highly leveraged households are taking out record debt. As pandemic benefits drop off in more recent data, the rate will rise closer to historic levels.
Even if we assume the improvements in household DSR aren’t superficial, it’s a high ratio. With home prices forecast to rise with interest rates (while incomes fall), the DSR is also likely to climb further. In this event, even more of the country’s disposable income would cover long-term debt. It’s not a huge surprise to see the OECD forecast Canada will see the slowest per capita GDP growth in the group.
A key point in that data that might not be obvious to everyone is when the US fell from 12% to 7.5%, those 4.1 points are back into the economy where it fuels more productive growth. Credit is repaying growth. That can make sense if you’re buying machinery and equipment, but other wise it’s a non-productive drain on economic growth.
Cue Canadians to say, “But OSFI is worried about too much GOOD debt!”
Meant to respond to you with the last one, but missed. Oh well.
It is important to remember OSFI’s role is to protect the banks from the public, not the public from the banks. When they’re worried, it’s not because the banks are under any threat — banks don’t fail, governments do first.
[Canadian banks grin ear to ear, clutching their bailouts funds]
and this is key to why Canada so aggressively pursues immigration. GDP has barely budget per capita since 2019, but averages up.
They see each additional immigrant as a sack of money to borrow with half their income and then pay their tax spending with the other half. GDP is up because there are more people but the total is meaningless for the public. It only means the country is capable of collecting more tax revenue, not that it’s facilitating a higher quality of life.
More tax money is good until your government debt begins to eclipse the size of your economy. It’s like they’re paying their mortgage with a credit card.
Always read the comments for your insights and this is another gem. Thanks and Merry Christmas to you. Hope you take some time away from discussing economics. Haha.
Time to cash in and get out of Canada .
Say a home worth $1,000,000 drops and sold for $500,000.
.$500,000 of paper lost at the sale .
It is the Gov money to start with ; are they the ones that benefit now, that the money is now gone from the books ?