Canadian Household Debt-to-Disposable Income Ratio
Ratio of the amount households owe compared with the amount they earn net of taxes and deductions.
- Canadian households owed $1.69 for every $1.00 of disposable income earned in Q2 2020. This is the lowest it has been since Q2 2015.
- Bank of Canada’s overnight interest rate remained at a historic low of 0.25 per cent in Q2 2020.
- Elevated uncertainty around employment opportunities due to the COVID-19 pandemic will likely influence continued lowering in household indebtedness in upcoming quarters.
The amount owed by Canadian households compared with the amount of disposable income earned (debt-to-disposable income ratio) fell from $1.76 in Q2 2019 to $1.68 in Q2 2020, the lowest Q2 ratio in five years.
The decline in Q2 2020 occurred amidst two counterbalancing influences:
- The continuation of a low-interest rate environment which is supportive of increased borrowing; and
- Increased uncertainties due to the onset of the COVID-19 pandemic and associated response measures. These led to a decline in employment, creating both employment and financial uncertainties. In such conditions, economic agents are likely to borrow less, and where possible, reduce debt.
In Q2 2020, Canadian consumers responded to the increased uncertainties by reducing debt.
In the short-run, the reduction of the debt-to-disposable income ratio is likely to persist given continued uncertainties.
Over the medium-term, the change in the Canadian debt-to-disposable income ratio is more uncertain, given that the low-interest rate environment is expected to remain in place and may encourage some Canadians to increase debt levels.