Canadians’ vulnerability to debt set to climb in coming years: budget office

The federal budget watchdog says in the coming years increasingly indebted households are poised to become the most financially vulnerable Canadians in decades.

OTTAWA — The federal budget watchdog says in the coming years increasingly indebted households are poised to become the most financially vulnerable Canadians in decades.

The parliamentary budget office released a report Tuesday predicting the ratio of debt payments — including principal and interest payments — relative to disposable income will creep upwards over the next five years as interest rates rise.

The office projects that by the end of 2020, this ratio will increase to 15.9 per cent of disposable income from its late 2015 level of 14.1 per cent.

“Household debt-servicing capacity will become stretched further as interest rates rise to ‘normal’ levels over the next five years,” the report said.

“Based on PBO’s projection, the financial vulnerability of the average household would rise to levels beyond historical experience.”

The increase would mean households would be even more vulnerable to negative shocks to their income or to interest rates, which could also have an adverse effect on financial institutions.

The budget office said the ratio’s highest level over the past 25 years was 14.9 per cent — a mark reached in late 2007.

Since 1991, the report said the total financial obligations of households has broken down, on average, in the following way: mortgage debt has represented 63 per cent of all debt, consumer credit 29 per cent and other loans eight per cent.

Over that period, household debt has increased each quarter, on average, by almost seven per cent on a year-over-year basis, the document said.

The budget office also noted that indebtedness has continued to edge higher in Canada, which has seen the largest increase in household debt relative to income of any G7 country since 2000.

Household debt loads have climbed during an era of low interest rates. The budget office said the effective household borrowing rate — which the Bank of Canada describes as a weighted average of interest rates on various mortgage and consumer loans — declined to 3.1 per cent in December from 6.7 per cent in January 1999.

The Bank of Canada has pointed to the potential hazards linked to high household debt — particularly if the country were hit by a severe recession or a prolonged period of increasing unemployment.

But the central bank has argued that the likelihood of household debt levels becoming a serious problem remains low and the situation is likely to improve once the economy starts to recover.

The bank has said there’s been little evidence of significant increases in delinquency rates.

Still, the Bank of Canada has described the country’s mounting household debt level as the most important vulnerability in the financial system’s armour — and this susceptibility has continued to grow.

Governor Stephen Poloz has said the weak spot is concentrated among 720,000 households that could struggle to make debt payments in a significant economic downturn.

The bank has found that the proportion of households holding debt higher than 350 per cent of their gross income — a high-risk category — has doubled to about eight per cent since the 2008 financial crisis.

People in this situation tend to be younger Canadians under 45 years old who usually earn less money. Poloz has said they are part of “emerging pockets of concern.”

On Tuesday, the budget office highlighted findings from 2012 Bank of Canada research that revealed that households headed by an individual aged 31 to 35 years old held the highest levels of debt.

That research also found that debt levels decreased steadily as the age of the person heading the household increased.

Just Posted

One strong wind leaves years of replanting work for Red Deer parks staff

High visibility boulevards already replanted, neighbourhood work starts next year

Red Deer-area indigenous filmmakers invited to apply for $20,000 grant

Storyhive launches Indigenous Storyteller Edition

Restaurant closed after compliance team patrol

Public Safety Compliance Team checked eight bars and restaurants on Oct. 19

Red Deerians await local cannabis stores

So far 31 stores in Alberta awarded licence to operate

Rimbey RCMP seek missing man with health concerns

Has anyone seen Bill Harris of Ponka County?

WATCH: Make-A-Wish grants Star Wars loving teen’s wish

The Make-A-Wish Foundation granted Anakin Suerink’s wish in Red Deer Saturday afternoon

Local Sports: Rudy Soffo valuable to Kings on the court

When Rudy Soffo first saw the RDC basketball Kings roster he was… Continue reading

Except for 1 kick, Saints, Ravens are evenly matched

BALTIMORE — In a matchup between the league’s highest-scoring offence and top-ranked… Continue reading

Julia Louis-Dreyfus gets a top award for comedy

WASHINGTON — After a 35-year acting career and with two iconic television… Continue reading

Ricky Skaggs, Dottie West enter Country Music Hall of Fame

NASHVILLE — Bluegrass and country star Ricky Skaggs, singer Dottie West and… Continue reading

AP Exclusive: Stephen Hawking’s wheelchair, thesis for sale

LONDON — Stephen Hawking was a cosmic visionary, a figure of inspiration… Continue reading

Canada deemed U.S. a safe country for asylum seekers after internal review

OTTAWA — Canadian immigration officials have determined that the United States remains… Continue reading

Bombardier sues Mitsubishi over alleged theft of aircraft trade secrets

MONTREAL — Bombardier is suing Mitsubishi Aircraft in the United States over… Continue reading

Three strong earthquakes reported in Pacific Ocean off Vancouver Island

Three relatively strong earthquakes were recorded Sunday night in the Pacific Ocean… Continue reading

Most Read