The household debt-to-income ratio rose again in Q1, according to StatCan
Household debt is shooting through the roof in Canada, with the debt-to-income ratio continuing to spike in the first quarter of the year.
Statistics Canada said on Wednesday that household credit market debt as a proportion of household disposable income rose to 184.5% in Q1, an increase from 181.7% in 2022’s final quarter.
That jump saw households borrow around $16.5 billion on a seasonally adjusted basis in the opening three months of the year.
The risks posed by high household debt are not lost on authorities, some of whom have sounded the alarm on Canadians’ spiralling debt levels in recent weeks.
In its latest Financial System Review, an assessment of financial stability, vulnerabilities and economic risks, the Bank of Canada noted it was “more concerned than it was last year” about households being able to service their debt, particularly with mortgage renewals at elevated rates looming for many borrowers.
With home prices plummeting over the past year, the central bank said a “large negative shock” – for instance, a harsh global recession – could see loan defaults spike in Canada and “sizable” credit losses for lenders.
The country’s national housing agency, meanwhile, has also highlighted ballooning levels of household debt in recent years. Canada Mortgage and Housing Corporation (CMHC) deputy chief economist Aled ab Iorwerth said in a recent note that household debt levels were around 80% of the size of Canada’s economy in 2008 – but had since spiked, exceeding the economy’s size by 2021.
About three-quarters of that debt is mortgage-related, ab Iorwerth said, with stress only having strengthened amid a series of central bank rate hikes over the past year.
“Over time, these higher interest rates translate into higher mortgage payments for households when those on fixed five-year terms renew at higher rates,” he wrote. “Those facing the most challenges are those with variable-rate mortgages who see higher interest rates immediately,” although risks are also reduced, he added, by the requirement for borrowers to qualify at a higher level than their contract rate.
“Now it seems [the Bank is] not going to cut until the second half of 2024. That’s a year from now, which we look at as another year for elevated rates,” says CIBC deputy chief economist Benjamin Tal.https://t.co/CHX7F9Ncl3#mortgagenews #industrytrends #ratehike #inflation
— Canadian Mortgage Professional Magazine (@CMPmagazine) June 13, 2023
Could further rate hikes increase mortgage market stress levels?
The Bank of Canada hit pause on rate increases for two consecutive announcements in March and April – but with its June decision having resulted in a 25-basis-point hike, could further financial strain be coming for mortgage holders?
Josh Nye (pictured top), senior economist at RBC, told Canadian Mortgage Professional that many borrowers on variable-rate mortgages have already been feeling the effect of higher rates, while a “delayed impact” for fixed-rate borrowers renewing on higher rates will extend as far as 2026-27.
Those higher rates will take a bigger chunk from many Canadians’ incomes and push debt servicing costs higher – but could they pose a significant risk to the financial system?
“In terms of people having difficulty making their payments, we’ve started to see some signs of delinquencies rising, not so much in the mortgage space but in other credit products,” Nye said. “Those are coming off of extremely low rates from the pandemic when we had low interest rates and a lot of government support.
“So maybe it’s not surprising that we’re seeing those delinquencies starting to rise, and probably this restart of the tightening cycle [the Bank’s latest increase] also moves in that direction. But I don’t think we’re going to really change our conclusions about those delinquencies just because the Bank of Canada is going 25 or 50 basis points further than we assumed.”
Where in the credit market are arrears most significant?
CMHC’s latest residential mortgage industry report also noted that the number of mortgages in arrears across the country remains low despite much-publicized concerns about the impact of higher rates.
That said, the agency’s research revealed differences between lenders, with credit unions seeing stable arrears rates while chartered banks, non-bank and alternative lenders all saw arrears tick slightly upwards.
By contrast, delinquency rates for other forms of debt such as credit cards and auto loans increased, CMHC said, with auto loan delinquencies returning to pre-pandemic levels and lines of credit registering a slight increase over the last two quarters of the year.
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