Report highlights capital region’s debt-to-disposable income ratio

Greater Victoria has some of the highest rates of debt to income in Canada, an indication of possible vulnerability to rising interest rates.

Vancouver and Toronto have the highest household debt-to disposable income (DTI) ratios in the country, a new report from Canada Mortgage and Housing Corp. said

Victoria follows in third place, with a DTI of 189 at the end of the second quarter of this year. That figure means that for every $1 of disposable income, $1.89 is owed.

That figure was up by 4.2 per cent from the same quarter last year. The increase is due to “strong growth in mortgage debt and instalment loans,” said report author Brent Weimer.

“But you take a look at the numbers from Victoria over the last few years, and they’ve been bouncing around from the $1.84 to $1.85 range, all the way up to $2.03 to $2.06.”

The capital region most recently reached $2.06 in the fourth quarter of 2013, Weimer said, adding that Victoria’s ratio is “above the national average, but not dramatically.”

Nationally, the DTI ratio has held steady for a couple of years at 170, although that varies depending on the community. Vancouver is the highest at 242 and St. John is the lowest in the country at 106.

The DTI ratio for households typically reflects mortgage debt, Weimer said.

Traditionally, mortgage debt makes up two-thirds of household debt, he said. Cities with more expensive housing markets tend to carry more mortgage debt.

Greater Victoria’s housing market is softening, but this region’s prices are among the highest in Canada.

The benchmark value for a single-family house in the core was $865,200 last month, said the Victoria Real Estate Board. A benchmark refers to the value of a typical home in a specific area. The core comprises Victoria, Saanich, Oak Bay, Esquimalt and View Royal.

Last month’s benchmark for a condominium in the region was $500,500.

CMHC also looks at the cost to service a mortgage.

“One of the good-news things is that while debt has been trending up for some households, mortgage rates have been trending lower. So a greater portion of their payment is going towards repayment of the principal and less is going to the actual cost of borrowing the interest,” Weimer said.

However, in the last couple of quarters, interest rates have moved higher.

“A lot of people expect that interest rates will continue to climb into 2019,” he said.

Rising rates would “put a higher burden on highly indebted households as a greater proportion of their income would be required to service their existing debt level,” Weimer said.

On a positive note, CMHC’s national mortgage trends and consumer credit trends report, also released this week, “shows that delinquency rates in Canada are extremely low and have actually been falling over time. So the current level of debt is not a problem currently,” he said.

But as interest rates continue to go up, highly indebted households need to be aware of how much more of their income might been needed to service their high debt levels, he said.

Households with the highest rates of debt are the most vulnerable to rising interest rates. This could mean that their required payments might go beyond their budget.

As their debt increases, they might cut back on purchases, arrange to make lower payments on the principal owing on a mortgage, or cut back on savings, the report said.

“Some households might even default on their loans if their incomes are not sufficient to cover higher expenses and credit charges.”

The federal government has imposed tougher mortgage rules, including a financial stress test, to help protect home buyers from rising interest rates.

After mortgages, common types of debt include home equity lines of credit, credit cards, automobile debt, and standard lines of credit, CMHC said.