As Canadian household debt has grown at an average 8% annually over the past decade, about twice the pace of income, it should take a significant slowdown in credit growth to reach sustainable levels. If credit growth slows to 2% per year, then it should take three years for the debt ratio to return to 140%. Otherwise, there is a risk that the number of households in the most vulnerable group (whose debt service ratio is at 40% or higher relative to their disposable income, as defined by the BoC), which currently stands at 1 million, will grow significantly. This segment of the population is also more exposed to any macroeconomic or income shocks.
Editor’s Note: This post is excerpted from a much longer analysis available exclusively to RGE Clients:North America Focus: Will FOMC Doves Rule the Roost? Consumption-Led Growth to Continue in Canada?