Canadian household debt higher than ever

Canadian household debt hit a new high in the third quarter, as borrowing rose faster than income.

Statistics Canada reported Monday that the ratio of household debt (consumer credit, mortgages and non-mortgage loans) to disposable income rose to 163.7 per cent in the third quarter of 2015, up from 162.7 per cent in the second quarter.

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That means the average household has roughly $1.64 in debt for every dollar of disposable income.

Consumers should guard against making impulse Christmas buys that add to already-heavy debt loads, said Janice Stuber, a Victoria-based trustee in bankruptcy with MNP Debt.

“Individuals are just spending a great deal of money on credit,” Stuber said. “It’s a little bit scary,” she said

Stuber notes that household debt-to-disposable income ratio is the highest level ever reported in Canada, topping the 163 mark set in the fourth quarter of last year.

Total household credit market debt reached $1.892 trillion at the end of the third quarter, up 1.4 per cent from the previous quarter.

Consumer credit debt was $572.3 billion, while mortgage debt stood at $1.234 trillion, reports Statistics Canada.

Disposable income increased at a slower pace (0.8 per cent) than household credit market debt (1.4 per cent).

“The deterioration … was expected, driven by a combination of sluggish income growth and still-hearty borrowing,” Bank of Montreal chief economist Doug Porter said.

“Hot housing markets in B.C. and Ontario are driving mortgage growth, over-riding the softness in oil-producing regions. On the flip side, the relentless decline in oil and other commodity prices is dampening income growth,” Porter said.

Household debt and the housing market have been key concerns for economists and policy makers.

Last week, the federal government moved to cool some of the country’s hottest real estate markets with new rules to require larger down payments for houses over $500,000.

TD Bank economist Diana Petramala said the new rules likely will affect only a small segment of the overall housing market.

“However, set against a backdrop of rising unemployment, the debt-to-income ratio is still likely to continue to trek higher through 2016,” Petramala said.

Too many people have too many credit cards with limits that are ridiculously high, she said. Some experts suggest people have one or two credit cards at most, with a credit limit of about $2,500.

“That’s all you really need. There’s no reason to have credit cards with these high limits. I’ve seen limits up to $40,000 on credit cards. The interest charges on those limits are not manageable,” she said.

Low interest rates have helped consumers manage their debts, but there are worries about what might happen once the cost of borrowing eventually starts to rise.

The report on household debt came a day before the Bank of Canada is set to release its latest financial-system review that will include an examination of household debt and potential vulnerabilities for the financial system.

Porter noted that while the household debt-to-disposable income ratio is at a new high, it likely will not dictate Bank of Canada policy.

“In its latest policy statement, the bank suggested that while ‘vulnerabilities in the household sector continue to edge higher,’ they see ‘overall risks to financial stability are evolving as expected,’ ” Porter said.

There’s no question there’s a post-Christmas rush for bankruptcy trustees as many people who have been making the minimum payment on their credit cards come to the realization they can’t manage, she said.

“Many are managing their interest charges for now but some are delaying the inevitable, allowing debt to snowball. Come January and February, when the bills come in, we see many individuals unable to meet their debt repayment obligations from holiday spending,” she said.

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