The anticipated interest-rate increase could be disastrous for households
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The Parliamentary Budget Office (PBO) has warned that Canadian households could reach new levels of financial vulnerability, as they are expected to take on more debt in spite of a long-anticipated rate increase.
According to a new report from the PBO, household indebtedness hit 174% in the first quarter of 2017, reported CBC News. In other words, Canadian households owed $174 for every $100 in disposable income they made.
The indebtedness ratio had spiked over 2002 to 2011 before plateauing at around 170% in early 2015. It has since started rising again, with PBO forecasting a ratio of 180% by the end of 2018. In that case, Canadian households will be more vulnerable to economic shocks like unemployment or interest-rate hikes.
Another measure of indebtedness is the average amount owed by Canadian households in principal-and-interest payments on debt. In the first quarter of this year, that number was $14.20 for every $100 in disposable income, according to the PBO. It’s forecast to hit $16.30 for every $100 by the end of 2021.
“Despite a projected rise in interest rates, we expect household indebtedness to increase due to continued gains in real house prices and elevated levels of consumer confidence,” the PBO said in its report.
With the Bank of Canada showing an increasing willingness to raise interest rates to “normal” levels, Canadian households will face even greater challenges in servicing their debt.
“Based on PBO's projection, the financial vulnerability of the average Canadian household would rise to levels beyond historical experience,” the report said.
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According to a new report from the PBO, household indebtedness hit 174% in the first quarter of 2017, reported CBC News. In other words, Canadian households owed $174 for every $100 in disposable income they made.
The indebtedness ratio had spiked over 2002 to 2011 before plateauing at around 170% in early 2015. It has since started rising again, with PBO forecasting a ratio of 180% by the end of 2018. In that case, Canadian households will be more vulnerable to economic shocks like unemployment or interest-rate hikes.
Another measure of indebtedness is the average amount owed by Canadian households in principal-and-interest payments on debt. In the first quarter of this year, that number was $14.20 for every $100 in disposable income, according to the PBO. It’s forecast to hit $16.30 for every $100 by the end of 2021.
“Despite a projected rise in interest rates, we expect household indebtedness to increase due to continued gains in real house prices and elevated levels of consumer confidence,” the PBO said in its report.
With the Bank of Canada showing an increasing willingness to raise interest rates to “normal” levels, Canadian households will face even greater challenges in servicing their debt.
“Based on PBO's projection, the financial vulnerability of the average Canadian household would rise to levels beyond historical experience,” the report said.
For more of Wealth Professional's latest industry news, click here.
Related stories:
Inflation in focus as Bank of Canada tilts toward rate hike
Investors move on BoC’s rate-tightening talk
