Calgary and Edmonton have seen significant year-over-year declines in debt-to-income ratios, according to a new report by Canada Mortgage and Housing Corp.
In both Alberta cities, the ratio was 162 per cent in the first quarter of this year compared with 170 per cent in the first quarter of 2017.
“The drops in Calgary and Edmonton’s DTI ratios was driven by income growth as total debt levels only decreased slightly,” said the CMHC.
The Canadian average was 171 per cent.
“The debt-to-income (DTI) ratio is a measure of the relative vulnerability of indebted households. While households may be able to service their debt during periods of low interest rates, some may face challenges when rates rise. Highly indebted households have usually few debt consolidation options to respond to increasing debt service costs,” said the report.
“Total household debt relative to disposable income has been trending higher as indebtedness has been rising faster than incomes, with mortgage debt being a major contributor, counting for two-thirds of all outstanding household debt in Canada. While the increasing trend in the Canadian DTI ratio has now paused, it remains near a record high, hovering around 170 per cent in Canada and varies significantly among Canada’s metropolitan areas. Vancouver and Toronto and have the highest DTI ratios in the nation at 242 per cent and 208 per cent respectively.”
The CMHC said households with elevated levels of debt are more vulnerable to increases in interest rates. With interest rates on the rise, highly indebted households could see their increased required payments exceed their budgets. The increased debt payment burden may come at the cost of reduced consumption, decreased savings or opting to make lower repayments on the principal.
“Some households might even default on their loans if their incomes are not sufficient to cover higher expenses and credit charges. If an increasing number of borrowers begin to default on their loans, financial institutions may decrease lending activities in response. These negative effects could then impact other areas of the economy,” said the CMHC.
“Research has shown that recessions in highly indebted countries tend to exhibit a greater loss in output, higher unemployment, and last longer compared to countries with lower debt levels.”
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