Canadians went on a record debt binge, and are now left with one of the worst hangovers in history. Statistics Canada (Stat Can) data shows the household debt service ratio (DSR) surged to a new record high in Q1 2023. Households now dedicate a record share of income to repayment, and it’s not just due to higher interest rates. The leverage was just astronomical.
Debt Service Ratio (DSR)
The household debt service ratio (DSR) is the share of disposable (post-tax) income spent on debt repayment. It’s measured in aggregate, providing the average level. This sometimes throws people a curveball when they see a 10% DSR, and think “oh, that’s not that bad.”
In reality, it’s important to remember that many people don’t have any debt. This can be because they’re older households, which Canada slants towards, or low income and can’t access much credit. Whatever the reason, these households bring the average down.
For example, let’s say three households have a DSR of 15%, two of them are debt free. A 15% DSR doesn’t sound so bad, but in reality it means the one with debt is spending 45% of its post-tax income on making debt payments.
When looking at the aggregate household DSR, the absolute value isn’t as important as the direction. As the share increases, a greater share of future income has already been spent. Current and future economic growth was diverted to fund the previous growth. The greater the DSR, the greater the drag on the economy and vulnerability in the event of economic shock.
Canadian Households Are Dedicating A Record Share of Income To Debt Repayment
Canadian households are borrowing more than they have in over two generations. Household DSR rose 1.77 points to 15.8% in Q1 2023. It’s 1.6 points higher than a year before, and notably a smaller increase compared to the single quarter. Households are now experiencing the highest DSR in at least 30 years, and likely goes much further back.
While a record, the DSR is only slightly higher than the rate reached in Q1 2019. Back then interest rates were less than half of today’s level, but the DSR was just 0.12 points lower. Improvements from 2020 to today were largely due to the cheap debt the Bank of Canada (BoC) flooded the market with as stimulus.
Canadian Mortgages Have Never Consumed More Income
Surprisingly, mortgage debt isn’t the only reason household debt payments are surging. Mortgage DSR climbed 1.0 points to 8.6% in Q1 2023, up 1.3 points from last year. There’s been nothing quite like the mortgage DSR at this level in at least 30 years. One would likely have to go back to the early 80s to see anything within spitting distance.
There’s been no shortage of discussion on how mortgage interest is driving payments. However, obligated interest payments represented only 62% of the mortgage DSR. One only has to go back to 2010 to see this level as normal, and interest represented 94% of the mortgage DSR back in the early 90s. The sheer size of the mortgage loans seems to be a much bigger contributor, relative to the incomes of Canadians.
The rising DSR presents as even more problematic when one considers population growth. Immigrants tend to carry lower debt loads in the first few years, especially in their first few years of work.
Since Canada’s population growth is primarily young adult immigrants, they’re likely providing more to the income side of the equation than debt payments. Even with this drag, the DSR is surging higher—in one of the most highly indebted countries in the world.