Victoria households could be in trouble if interest rates continue to rise.
Victoria is in Canada’s top three cities for highest household debt, according to a debt-to-income (DTI) ratio report released this week by Canada Mortgage Housing Corp.
With interest rates on the rise, highly indebted households could see their increased required payments exceed their budgets.
“In the declining interest rate environment, debt-to-income ratio has been climbing,” said report author Brent Weimer, senior specialist in socio-economic analysis for CHMC. “We are now seeing rates push higher. Currently it is not problematic, but it could be if there are significant interest rate jumps.”
Though for most of Canada the increasing trend in the DTI ratio has now paused, Victoria’s strong growth in mortgage debt and installment loans has its household debt to disposable income on the rise and near record levels.
The DTI ratio is a measure of the relative vulnerability of indebted households. While households may be able to service their debt during periods of low interest rates, some may face challenges when rates rise.
“You will see people now renewing at a higher rate, with a larger portion of income servicing their debt,” Weimer said.
While Victoria has one of the highest DTI ratios overall due to real estate, it has the lowest DTI ratio in the country – 30 per cent compared to the national average of 39 per cent – for debt not secured by real estate, such as credit card debt and car payments.
The Bank of Canada has been warning that high household debt could be a potential vulnerability to the Canadian economy.
If an increasing number of borrowers begin to default on their loans, financial institutions may decrease lending activities in response. These negative effects could then impact other areas of the economy.
Research has shown that recessions in highly indebted countries tend to exhibit a greater loss in output, higher unemployment, and last longer compared to countries with lower debt levels, according to the CMHC report.
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