The Canadian central bank’s addiction to low rates helped households rack up dangerous amounts of debt. Statistics Canada (Stat Can) data shows the household debt to income (DTI) ratio smashed the previous record in Q1 2023. Households are now the most highly leveraged in the country’s history, as they borrow money at a significantly faster rate than their incomes are growing.
What Is A Household Debt To Income Ratio?
A household debt to income ratio is the ratio of debt held by a household, in contrast to their income. A rising ratio means debt is accumulating faster than income. A falling ratio means income is rising, and/or households are paying down their debts.
Generally speaking, a stable or falling ratio is ideal. A rising ratio is often accompanied by an economic boom, but drags future growth as people repay that debt. The reason is the debt utilized gives a short-term boost to consumption today, at the expense of income later. The higher the ratio, the bigger the drag will be, and the greater the odds of a financial crisis.
Canadian Households Hit A New Debt Leverage Record
Canadian households are borrowing like there’s no tomorrow. The DTI ratio climbed 6.2 points to hit 198.5% in Q1 2023. It’s a massive increase, pushing debt to nearly double the share of income. The ratio also happens to be the highest ever recorded in Canada’s history, with Stat Can flat out calling it a “financial risk.”
Canadian Household Debt To Income Ratio Hits A New Record
The ratio of debt to disposable income for Canadian households.
Source: Statistics Canada; Better Dwelling.
Moral Hazard Is Fueling Unusually Fast Credit Growth
A sharp seasonal move is expected between Q4 and Q1, as holiday income tapers and people pay their holiday bills. However, the 20.7 point increase in Q1 2023 was unusually large, implying debt accumulated 10% faster than income. That’s like borrowing $110 for every $100 in new income in the quarter.
For context: In terms of points, the quarterly increase was nearly double the move seen a year before, and nearly 5x the increase seen in 2019.
Canadian households haven’t let their low income growth deter consumption, they’re making up for it with debt. With such a high surge in credit relative to income, it’s easy to understand how the economy is outperforming expectations. No logical model would forecast households suddenly borrowing significantly more as rates climbed sharply.
Households are demonstrating unprecedented moral hazard. Sharply higher interest rates haven’t been able to tame credit growth anywhere near incomes. Part of this is fueled by the wide belief the central bank doesn’t have the discipline to hold rates higher. At the same time, lax regulation has demonstrated that Canada’s financial system is more afraid of seeing defaults than consumers.