September 11, 2020 | 10:24
The Saving Pace
Canada's household debt-to-disposable income ratio plunged a record 17.2 ppts to 158.2% in Q2 after hovering near all-time highs for the past couple of years. Just a note of caution here: this figure was likely skewed by seasonal factors in a quarter that was anything but normal. On a not seasonally adjusted basis, the ratio fell by a more modest 5.0 ppts to 166.8%, likely closer to reality. That still marks a record drop nonetheless, as government support measurescatapulted savings to an unprecedented level, which in turn lifted disposable income even as borrowing held fairly stable. Meantime, the debt service ratio (interest and principal as a share of disposable income) dropped 2.1 ppts to 12.4%, the largest decline on record.
Looking at the asset side of the balance sheet, net worth climbed 12.3 ppts to 855.0% as a share of income. Assets rebounded following the Q1 plunge, as equity prices embarked on a monumental ascent. Meantime, the debt-to-asset ratio dropped to 16.5%, with households now having $6.06 of assets for every $1 of debt. Still, owner’s equity in real estate remained fairly steady, edging down a tick to 74.2%.
While most attention is usually given to household debt loads, we’ll be keeping a close eye on government debt ratios, which surged in Q2, after holding fairly stable over the past decade. The funds needed to finance CERB and other support programs resulted in a record increase in government borrowing, with the BoC a large buyer of government-backed securities in a bid to shore up the economy. Gross general government debt (includes all levels of government) pushed up to 132.5% of GDP, the highest since 1996, while net debt-to-GDP climbed above the 46%-mark, the highest since the end of 2013.
Bottom Line: Though the household debt-to-income ratio dropped in Q2, the combination of low borrowing rates and hot regional housing markets could spur Canadians to ramp up borrowing. That suggests the pullback in the debt ratio could prove to be temporary.