Household credit market debt as a proportion of household disposable income declined from 176.6 per cent to 176.3 per cent in the fourth quarter of 2019, according to Statistics Canada.
“In other words, there was $1.76 in credit market debt for every dollar of household disposable income,” said the federal agency in a report on Friday.
“The household debt service ratio, measured as total obligated payments of principal and interest on credit market debt as a proportion of household disposable income, rose to 14.98 per cent, as total debt payments (+1.5 per cent) outpaced disposable income (+1.3 per cent). Total debt payments were 6.9 per cent higher in 2019 than in 2018, while household disposable income increased 4.9 per cent relative to 2018.”
Ksenia Bushmeneva, Economist with TD Economics, said the bright side of recent movements in interest rates is that households will get some reprieve from rising debt servicing costs this year.
“Judging by the re-acceleration in mortgage credit growth, households were already embracing lower mortgage rates last year. Luckily income kept pace, keeping the debt-to-income ratio stable. This is where the risk lies this year. With both income and economic growth poised to slow, leverage may begin to rise if households go on a borrowing spree,” said Bushmeneva.
“Financial portfolios have taken a beating at the start of 2020, but rising home prices in many provinces and low interest rates will ease some of the strain on household balance sheets. This is particularly true for provinces not impacted by the plunge in the oil prices, where home prices are likely to continue to rise. However, further acceleration in credit growth amid slowing income gains, poses a risk and may renew the buildup of the already-high financial vulnerabilities.
Priscilla Thiagamoorthy, Economist with BMO Economics, said that with coronavirus “rapidly changing the economic outlook, concerns about consumers’ borrowing binge have been set aside for now.”
“Disposable income will likely slow as overall activity takes a big hit in the near-term, raising the debt ratio. But, with the BoC already lowering rates . . . the debt service burden should ease, providing some relief to households.”
