June 20, 2023

Weekly EconMinute—Debt and income

In this week’s EconMinute, we’re talking about debt and income.

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For Canadians, the amount of debt they hold is growing faster than their earnings.

Recent data from Statistics Canada shows that debt as a proportion of disposable income rose to 184.5% in the first quarter of this year, up from 181.7% in the last quarter of 2022. Put simply, this means that Canadian households owe $1.85 for every $1.00 of disposable income. A decline in disposable income (-1.0%) was a key factor in pushing this ratio higher—the result of reduced government transfers to households and higher interest costs. At the same time, debt levels continued to rise (+0.6%).

This indicator is known as the credit market debt to disposable income ratio (debt ratio), where credit market debt refers to consumer debt, mortgages, and other loans, and disposable income is what you take home after taxes and non-discretionary spending. This ratio provides insight into the financial health and stability of households.

Over the decades, Canadian households have experienced a steady climb in their debt ratio. Low interest rates and easily accessible credit encouraged Canadians to finance houses, vehicles, and other goods. In fact, Canada has the highest debt ratio of the G7 countries in no small part because of Canada’s strong housing market. High and quickly growing housing costs have forced Canadians to take on higher mortgage debt levels.

In the last couple of decades, mortgage debt has accounted for an increasing share of total debt. Today, mortgages account for nearly three-quarters (74.3%) of the total debt—up nearly 10% in the last 10 years.

It is worth noting that the debt ratio varies across the country. Here what the latest data shows:

  • Provinces with the highest housing costs—namely British Columbia and Ontario—have credit market debt about twice their disposable income.
  • Alberta has the third highest debt ratio, owing $1.70 for every $1.00 of disposable income—just below the national average.
  • The Atlantic provinces have significantly lower debt ratios than the other provinces—ranging from $1.19 to $1.36 owed for every $1.00 of disposable income.
    • This might be because the Atlantic provinces have older populations relative to the rest of Canada, and the debt ratio typically declines in the latter half of life.

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