Vulnerability of indebted households to hit ‘historic’ levels as rates rise: PBO
The expected, gradual rise of interest rates over the next few years is poised to push the financial vulnerability of indebted Canadian households well above levels seen over the last three decades, warns a new analysis.
A report released Tuesday by the parliamentary budget officer predicted households that have been amassing debt will be left exposed to economic shocks at “levels beyond historical experience” when Canada’s low-rate era finally winds down.
The study comes amid concerns that rising debt – largely fuelled by surging housing prices – has already made households increasingly vulnerable to events like job losses triggered by a severe recession or a higher-than-expected jump in interest rates.
The rising rates threaten to make it harder for Canadians to pay down their debt because they will no longer enjoy an offset from the rockbottom borrowing costs, the PBO said.
The country’s debt service ratio – the household debt payments relative to disposable income – has already climbed above the historical average seen between 1990 and 2017, said Mostafa Askari, the assistant parliamentary budget officer.
“That by itself has to be considered alarming because obviously it means that the households will be more vulnerable over time to any kind of shock to the economic system,” Askari said.
Askari said the ratio will continue its ascent when rates start rising.
Some analysts predict the first hike to come as early as this year.