Key household debt-to-income ratio fell in Q2

The amount Canadians owe relative to their income fell in the second quarter as government aid to help offset the economic impact of the COVID-19 pandemic helped lift disposable income while the amount of debt was relatively unchanged.

Statistics Canada said Friday that household credit market debt as a proportion of household disposable income in the quarter fell to 158.2% on a seasonally adjusted basis compared with a reading of 175.4% in the first three months of the year.

In other words, Statistics Canada says there was $1.58 in credit market debt, which includes consumer credit, and mortgage and non-mortgage loans, for every dollar of household disposable income.

TD Bank economist Ksenia Bushmeneva said government income support measures boosted disposable income and as a result, income growth outpaced debt accumulation.

“One of the major risks heading into this pandemic-induced recession was the high level of household indebtedness in Canada, which could greatly amplify the hit to the economy and slow the subsequent recovery,” Bushmeneva wrote in a report.

“So far, it appears that the consumer side of the economy has held up better than might have been expected at the start of the crisis. Reduced spending during the lockdown phase combined with government income support measures allowed some households to paydown consumer debt and ramp up savings.”

Even so, Statistics Canada noted that annual trends show that lower income households tend to have a higher debt to disposable income ratio.

Bushmeneva noted that there are risks and challenges ahead as federal aid programs and payment deferrals by financial institutions have helped avert a “delinquency tsunami.”

“These support measures will gradually begin to wane, and the state of the labour market and consumer finances cannot diverge indefinitely. As such, delinquencies and consumer insolvencies will likely begin to rise at the end of this year and into 2021,” Bushmeneva wrote.

The household debt service ratio, measured as the total obligated payments of principal and interest on credit market debt as a proportion of disposable income, dropped to 12.4% from 14.5% as payment deferrals related to the Covid-19 pandemic reduced the obligated principal paid in the second quarter.

Overall, credit market debt totalled $2.33 trillion at the end of the quarter including $1.55 trillion in mortgage debt and $779.4 billion in consumer credit and non-mortgage loans.

The Canadian Press

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