Toronto, Vancouver most ‘vulnerable’ to interest-rate hikes
CMHC says those with high debt could see budgets stretched if rates continue to rise
Canadians living in two of the country’s largest cities may find themselves more “vulnerable” to interest rate increases as personal debt levels in Toronto and Vancouver continue to hit record-levels, warns a report by Canada Mortgage Housing Corp.
The housing agency says the debt-toincome (DTI) ratio for those living in Vancouver climbed to 242 per cent in the second quarter, which ended June 30.
That means that for every $1 of disposable income, $2.42 is owed. It was simi- larly high in Toronto, where the DTI is at 208 per cent.
This is the highest ratio recorded for both cities for any second quarter since 2015. Nationally, the DTI ratio is 171 per cent.
A major contributor to increasing levels of indebtedness is mortgage debt, which accounts for two-thirds of all outstanding household debt in Canada.
CMHC says those with elevated debt levels could see their budgets stretched if interest rates continue to rise.
“While households may be able to ser-
vice their debt during periods of low interest rates, some may face challenges when rates rise,” it said in the report. “Highly indebted households have usually few debt consolidation options to respond to increasing debt service costs.”
The report noted that higher interest rates means that households could see an increase in the amount required for debt repayment, which could exceed their original budgets.
“The increased debt payment burden may come at the cost of reduced consumption, decreased savings or opting to make lower repayments on the principal,” it warned.
“Some households might even default on their loans if their incomes are not sufficient to cover higher expenses and credit charges.”
CMHC says this could lead to a ripple effect if households begin defaulting on their loans, and banks begin scaling back on the loans they give out.
“These negative effects could then impact other areas of the economy,” it said. “Research has shown that recessions in highly indebted countries tend to exhibit a greater loss in output, higher unemployment, and last longer compared to countries with lower debt levels.”
The report, which was based on an analysis with data from credit monitoring firm Equifax, Statistics Canada and the Conference Board of Canada, also noted that household debt levels vary widely, and have in fact, gone down in some of Canada’s largest cities.