Despite rising debt levels and increasing home prices, Canadians continue to allocate less income toward paying off debt, according to the Canadian Household Financial Health and Consumer Credit Q1 2015 report [paywall] recently published by credit rating agency DBRS.
Consumer debt servicing dropped to 3.0% in the first quarter, from a peak of 4.2% in the fourth quarter of 2007. while mortgage debt servicing continues its fall since 1990, currently standing at 3.5%. The main risk to the market continues to be the vulnerability of the highly indebted households to a slump in the labour market, says Jamie Feehely, managing director of Canadian Structured Finance at DBRS.
Household debt-to-personal disposable income (PDI)
Since 1990, the Canadian ratio of household debt to income grew 89.7% while household liabilities (including mortgages, consumer credit, bank loans and trade receivables accounts) grew 417.9%. Feehely says it will take very little movement in unemployment or interest rates to create a dire situation.
One of the positive things that happened in the first quarter was that the savings rate went up, from 3.6% to 5%, a “huge” lift, says Feehely. “I think the 1.4% increase is a big deal,” he says. “The single largest asset most people have in this country is their house. So when they start to slowly diversify away from that and save, it’s good.”
The decline in oil price since last summer has hurt the national GDP and pushed up the unemployment rate in oil-heavy provinces (Alberta, Saskatchewan and New Brunswick). Feehely says the unemployment rate has gone up by almost 1% in Alberta this quarter while delinquencies on mortgages have not risen yet. Historically, there’s high correlation between unemployment and mortgage defaults, and that could mean more trouble yet to come. “There are scalebacks when oil price drops like that,” says Feehely. “I”m worried about the contraction of jobs there and whether people have saved enough to continue paying their mortgages.”