Per CMHC, Canadians total household debt relative to disposable income slowed to a standstill in Q2 2018. The recent pause comes after years of household debt rising faster than incomes. Unsurprisingly mortgage debt has been the largest contributor, accounting for two-thirds of all outstanding household debt in Canada. While Canadians debt to income ratio has flatlined at 170%, it continued to grow in Vancouver & Toronto.

debt to income canada
Debt to income ratios across Canada. Source CMHC

The debt to income ratio climbed to a new high in Vancouver, ballooning to 242%. Vancouver households pushed the mortgage debt-to-income ratio to 177% and the HELOC debt-to-income ratio to 31%. In other words, the debt-to-income ratio tied to real estate in Vancouver sits at an eye watering 208%.

Debt to income by product type. Source: CMHC

With interest rates on the rise this can squeeze households ability to service the debt. This is whats called a debt servicing issue, where the rise in interest payments outpace the rise in incomes. As a result, households could begin to deleverage, which causes credit to contract, consumption to slow, and home prices to drop.

While this is certainly not the case in Vancouver at the moment, it appears the Bank of Canada is preparing behind the scenes. In November they announced they would begin purchasing Canada Mortgage Bonds. This is what central banks do when they want to ensure market liquidity and keep borrowing costs stable. And while the Bank of Canada was quick to ensure the move was “for balance-sheet management purposes only” and “the purchases will be conducted in the primary market, on a non-competitive basis,” one can’t help but question the timing of it all.

Today Bloomberg reported, The Bank of Canada purchased Canada Housing Trust bonds for the first time, scooping up C$250 million of the federal agency’s C$5.5 billion five-year notes, suggesting investor demand was likely not sufficient. However, the Bank of Canada was quick to affirm that their participation isn’t reserved for times of market volatility and this was merely a move to offset liabilities…


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