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Analysts look at many different metrics when they assess the financial health of a nation’s people and the economy at large. The amount of debt relative to the average income is one such statistic. In recent years, Canadians have been using debt more and more to fund the purchase of homes, goods, educational advancement and many other things. So much so, in fact, that our average household debt has increased to be far greater than our average income.

What is this ratio? What does it represent? How is it calculated, and most importantly, what does it mean for the financial security of Canadians everywhere?

Defining Household Debt

The calculation of household debt to income ratio is fairly simple, and works just as well for individuals looking to assess their debt health as it does at the national scale. All you have to do is compare the amount of outstanding debt you owe to the amount of gross income you earn, and express the debt as a percentage of that income. If you’re making more than you owe, you’re probably doing fairly well. Canadians overall, however, are certainly not fitting into this category.

Canada’s Debt History

Household debt in Canada has been rising continuously for some time – over the past thirty years on average. The overall amount of debt held by Canadians increased to 171.31 percent of gross income in 2018 from 170.20 percent in the previous year. Nationwide, this is the equivalent of roughly $1.8 trillion in debt or $1.70 of debt per dollar earned! This is double the figure from twenty years prior. Debt to income ratio has been rising especially rapidly for the past decade, as shown in the chart below:

How We Got Here

With the assumption of so much debt, Canadian consumers are at higher than average financial risk. The risk of default and other negative outcomes is significantly increased as the amount of debt you carry also increases. So how did we, as a nation, get to the point of being so reliant on debt?

This question has many potential answers, all of which require a fair bit of deep reading into the trends and patterns of the Canadian economy over the last several decades. It is particularly interesting to look at the groups where the most debt is concentrated, and why, though those questions may exceed the scope of just one blog. However, there are two major factors that have driven the growing burden of debt in Canada: interest rates and housing market changes.

Interesting Correlations

Though they have recently begun to rise again, interest rates in Canada have been decreasing steadily for the better part of thirty years, as shown below. Over the past eight years rates have been stagnant at some of their lowest levels in history.

Lower interest rates are, of course, meant to create more favourable conditions for borrowers as it is cheaper to borrow money when rates are low. Remarkably low rates are meant as a means of economic stimulus and a counter to inflation, which explains why rates fell precipitously worldwide in the wake of the 2008 financial crisis. The cost of this stimulus is that, allowing consumers to finance more and more purchases with debt and doing little to help consumers regulate their use of that debt, the government may be setting ourselves up for a shock when it comes time to pay what we owe.

Rising Debt and Housing Prices

Ask any Canadian what their biggest financial goal might be, and surely a great many would answer “owning a home.” Low interest rates, as mentioned above, are fuel for prospective homebuyers and the real estate market in general. However, demand – especially in rapidly urbanizing and high density areas like Toronto and Vancouver and their surrounding suburbs – has a tendency to increase more rapidly than supply. This state of affairs has pushed house prices much higher in recent years, and this change has been much faster and of greater magnitude than the change in average income.

In short, it’s more expensive to own a home, and it’s harder to earn what we need – so we have turned increasingly to mortgages to finance our homes with debt that is getting harder to pay off.

What Can We Do About It?

At the big picture level, increases in interest rate have been implemented as a measure to help curb the impact of the blisteringly hot housing market on our debt-heavy culture. However, spending on real estate is but one part of the Canadian debt picture. Like it or not, we are still using debt to fund our lifestyle aspirations in more everyday ways, from the clothes we buy to the cars we drive. It falls to Canadian consumers to try to control the debts that they can control in the short term, most importantly by cutting down on spending and taking as many measures as possible to pay down existing short term debts like those carried on credit cards. Measures like debt consolidation, counselling, and the services of alternative lenders including Progressa are all available to the public to help control their day to day debts, pay off what they can, and get back on track to using less debt while the economy at large adjusts itself back to a more sustainable environment for borrowers.

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