Debt Burdens Eating Up Growing Share of Canadian Incomes

Debt Burdens Are Eating Up A Growing Share of Canadian Incomes

The comments below are an edited and abridged synopsis of an article by Erik Hertzberg

Canadians are using a bigger chunk of their paycheques to meet debt obligations.

The household debt service ratio—a measure of the share of income that goes toward paying interest and principal on mortgage, credit card and other types of debt—reached 14.2% in the second quarter, the highest level since the end of 2008.

The increase in the debt-service ratio follows 4 interest rate hikes in the past 14 months from the central bank, which is expected to raise borrowing costs again in October. A larger proportion of income will service interest payments directly—about 6.9%, the most since 2013.

Elevated debt levels remain a vulnerability for the economy. Canadian households are the most leveraged in the Group of Seven, with total debt of about C$2.19 trillion ($1.68 trillion), or C$1.69 in debt for every C$1 of income. That jeopardizes the sector’s future contribution to real gross domestic product growth.

About 1.9 percentage points of growth were attributed to total consumption spending in 2017—a number that’s expected to fall to 1.2 percentage points by 2020, according to Bank of Canada projections.