The household debt to income (DTI) ratio has risen in the third quarter, adding to the woes of already highly indebted Canadian households. The Canadian DTI has reportedly risen sharply to 183.3% in the third quarter of 2022. This is 4.3 points higher than last year. Household DTI reached record highs in the fourth quarter of 2021 and in 2018. However, with the current trajectory, experts anticipate that these records could be smashed in the coming months.
The likelihood of a further increase is being driven by expected rises in interest rates in 2023. As the majority of credit is made up of mortgage payments, increases in both variable and fixed-rate loans will likely lead to interest charges taking up a greater share of repayments.
The household credit market debt to disposable income ratio is used to establish the level of indebtedness. It factors in mortgage loans, non-mortgage loans and consumer credit balances. It is compared against disposable income which is the amount left over after mandatory deductions.
When this ratio rises, it indicates that debt is growing faster than income. This places households at greater risk and more vulnerable to interest rate hikes and economic shocks. When the ratio declines, it indicates that incomes are rising faster than credit, promoting economic growth.
Based on the report, Canadians are now owing $1.83 for every $1 they earn as disposable income. This rate is considered high for a developed country, with every point that is added above 70% considered to be an economic drag.
The total value of the household credit market debt was reported to have increased by 1.2% to almost $2.8 trillion. Mortgage debt accounted for $2.07 trillion of this, while $722.6 billion was made up of non-mortgage loans. The household debt service ratio that measures total obligated payments including principal and interest on credit market debt as a proportion of the disposable income of the household rose to 13.97% during the third quarter, up from 13.46% in the previous quarter.
As disposable income shrinks for Canadians, economists like Jim Stanford of the Centre for Future Work are worried that it may lead to a recession and further negative impact on business investment. Stanford said that household consumption accounted for more than half of Canada’s GDP, making it the biggest contributor to economic growth.
He noted that there was a $16 billion increase in interest payments made during the third quarter that accounted for more than half a percentage point of the country’s GDP. Interest payments on mortgages rose by over 16%, the sharpest increase on record. Stanford predicts that the situation is likely to worsen in the coming months.
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