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Canadian household debt-to-income.

TD Bank Economics recently provided a second look at Canadian household debt-to-income ratio and makes the point that Canadians on average are somewhere between no problem and a U.S. type of problem because the rate of debt accumulation has been more gradual. I’m not convinced.


This past week, TD Economics provided another look at Canadian household debt-to-income. (See previous post). Again, the statistic referred to the household debt-to-income ratio. (See chart). TD makes the point that the rate of U.S. household debt-to-income accumulation was faster (the slope of the accumulation line was steeper) relative to Canadian households (with a more gradual debt accumulation).

This makes Canadian indebtedness less of a problem?

Canadian debt to income ratioDebates over the rate of income growth (roughly equal to the inflation rate) versus the rate of debt growth are largely irrelevant. The point is that it’s the level of debt not the rate of accumulation that matters.

Debt levels are simply too high relative to income.

Note that the chart (below) implies about a 10% – 15% overvaluation in the Canadian housing market.

The Bank of Canada and Minister of Finance will force debt reduction first through regulation (CMHC – reduced amortization periods, larger down payment requirements) and then through increased interest rates (making harder for many to qualify or refinance).

One way or another, Canadians would be wise to get their financial houses in order.

Canadian housing market overvalued


Next time? More Risk Management.
Doug Cronk, CFA is Manager, Investments for a Canadian Pension Plan

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