click to embiggen
Canada US debt
Source: BCA



I have been meaning to get to this since I was in Toronto last week, where I saw my friend (and fishing partner) Martin Barnes of BCA give an excellent presentation at the Toronto CFA Prediction Dinner.

One of that charts that really stood out to me was the one above. You cans ee how as the housing boom deflated the debt to income ratio fell 30% or so in the US. But in Canada, there was no such day of reckoning, and that ratio diverged from the USA’s and is now above 160%.

There are many reasons why Canada’s boom did not bust — their laws require mortgage insurance, minimum down payments and actual credit checks; they have a well regulated banking system less given towards spams of insanity. Economically, energy and minerals are still hot; and there are enormous numbers of Chinese buying up condos in Vancouver and Toronto and elsewhere as a way to get cash out of the country and create an emergency life raft in case China implodes.

Regardless of these and many other differences between our two nations, this chart does give one pause . . . .


Category: Credit, Financial Press, Real Estate, Regulation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

34 Responses to “Household Debt-to-Income Ratio, USA vs Canada”

  1. rd says:

    A lot of foreign money has been coming into the real estate markets.

    But another factor has been the general boom in commodity prices over the past decade (other than the little accident in 2008-9, quickly resolved by Uncle Ben). In Canada, commodity prices drive marginal employment and the Canadian dollar. This chart will head south quickly if there is a protracted bear market in commodities.

  2. BenE says:

    As a Canadian that does freak me out a bit. Houses are completely unaffordable out west. Even people I know with good jobs such as just out of school physicians have difficulty affording a home if they want to live in Toronto or Vancouver.

    I always assumed these high prices were some kind of international distortion due to the large influx of rich asians crowding out the housing market. However, I look at the graph above and wonder: If these people were bringing so much money and were so wealthy, why would they have to buy houses using so much debt?

    This high level of debt busts the myth of well heeled internationals buying all the highly priced houses. There is clearly a lot of people with little money taking up huge mortgages.

    I guess when you live in Vancouver and your parents live in a million dollar house on an average salary and your friends all get huge mortgages, these levels of debt can seem normal. People have to remember that their parents bought these houses at a fraction of current prices so it was reasonable for them, that these houses will probably lose value at some point unless wealth immigration continues for a long time and that their highly indebted friends are in danger if interest rates go up or prices go down.

    What it comes down to is that getting these huge mortgages is a leveraged gamble on the prediction that a high level of increasingly wealthy immigrants will continue their inflow for multiple decades to come.

    Last year I went to an Atlantic Provinces economic development conference that happened to be in my hometown where one of the VP of TD Bank was the keynote speaker and he made his presentation about the 2008 crash. There was a question period at the end. He lived in Toronto so I asked him if he thought native canadians starting a career were able to afford a place to live in Toronto. He answered half jokingly that his two grown up daughters were still at home and often complaining they couldn’t afford a place of their own.

    • rd says:

      Prices are controlled at the margins. A relatively small number of Asian and other foreign buyers coming in with cash can push up prices forcing locals to take out bigger mortgages. A number of the foreign buyers may not even live in their houses – they hold them as offshore investments or as boltholes. In some cases, some of them lived in Canada long enough to get citizenship and then went back to their original country – that was definitely the case in Vancouver before the 1999 transfer to China.

      It doesn’t take very many transactions to distort a relatively illiquid market like housing.

  3. rp says:

    Another possible reason is that the government directed an extra $600 billion in mortgage insurance to marginal buyers in 2008-2009, and took $140 billion of mortgages off the books of banks allowing them to lend. The US equivalent per capita is 6 trillion and 1.4 trillion, respectively. People expecting a pullback were sorely disappointed.

    I think the moral is that house prices can keep going up as long as government subsidies do.

  4. Frilton Miedman says:

    I feel dumb.

    I few times I’ve stated US debt to income was 140% in 2007, and down to 130% now.

    Oops, it was 125%, down to 105% (maybe I was citing different data, I don’t know, but me thinks BR has better sources)

    That said, holy cow, Canada has a problem, a big one.

    • Keith R says:


      BR is presenting a chart on household debt, but you might be referring to total debt. Total debt includes gov’t debt, and the trajectory looks different. Over the last few years households have been deleveraging, but the US gov’t is taking on debt. This means that total debt has not declined nearly as much as household debt.

    • Sharkbite says:

      Don’t worry. The Canuckians will probably just default their way out of household debt like we did.

  5. It will take just one number for housing prices, and therefore sustainability of debt, to fall: higher interest rates. This figure is beyond Canada’s control, and will depend primarily on US rates, followed by China.

  6. gusgus says:

    Income inequality is less in Canada than the U.S. I wonder if the median Canadian (or Canadian household) in 2013 is better able to support his/her/its debt than the median American (or American household) was able to support its debt in 2007?

  7. danam says:

    Here is a link to a report that is 3 months old that puts a spin on the above graph. There is questioning as to the validity of the straight comparison of data as the methodologies used to calculate Debt to Income are different between Canada and the US.

    The general shapes of the curve remain the same in the report, the debt to income ratio never stopped rising in Canada. But when they attempt to adjust for the different methodologies, they offset the curves and Canada’s current reading is slightly less then where the US numbers peaked 6 years ago.

    You can review the report for details.

    • That report suggests exactly what the chart shows

      • Frilton Miedman says:

        Dan’s TD report, might explain why I had a different recollection of debt ratios –

        “After making adjustments to bring these measures more in line, the Canadian indebtedness ratio comes down to 156%, compared to a 177% peak reached in the U.S. leading up to the recession and the current U.S. level is 152%. The implication being that while Canadian households are still highly indebted, on an apples-to-apples comparison, they are still less indebted than U.S. households were prior to the financial crisis and the ratio of debt-to-income is roughly equivalent after the recent U.S. deleveraging”

        And now, I’m left to wonder whether data isn’t being cherry picked to suit agenda.

    • gusgus says:

      Thanks for the link — the data is quite informative!

  8. rd says:

    I found out an interesting thing today.

    In my business, much of our work is done as billed time with unit rates for hours. Apparently, the overhead mark-up on our hourly pay rate is lower in our Canadian branches than our US branches. It sounds like this is mainly because of our much higher health care insurance costs that are paid for by the employers. The end result is that our Canadian folks have to explain to their Canadian clients why the American people working on their projects have such high billing rates.

  9. neddyj says:

    Interesting chart – that the canadian housing market can be so robust without the ‘no credit check’ shenanigans that went on here when the numbers here were robust.

    What kind of fishing? Deep sea, freshwater, etc?

  10. SkepticalOx says:

    Not sure if it was you posting this or not, but here’s the interactive housing price chart @ the Economist:

    You can play around with the date range, but Canada has more worrying signs. Price-to-rent is among the highest if not the highest. Same with price-to-income.

  11. RW says:

    I don’t have a sense of how much speculative fever is involved in Canadian RE but assuming better lending standards I suspect a RE contraction would still have smaller macroeconomic repercussions than the US and most of Europe’s; e.g., the sheer numbers of fraudulent loans generated by big mortgage lenders like IndyMac and Countrywide resulted in the collapse and virtual abandonment of entire townships when loss of equity made flipping impossible.

    • RW says:

      That e.g., was for the USA. Doubtless there was some degree of speculation and fraud in Europe too but there were other significant factors; e.g., large net capital inflows from northern Europe to southern inflating prices and wages, mortgages in different currencies and/or from banks of different countries, etc.

  12. Livermore Shimervore says:

    Chart needs the most important line when discussing real estate values — wage growth.
    That’s for both the United States of Wealth Disparity and the Canadians.

  13. [...] Barry Ritholz highlights the alarming debt to income ratio for Canada compared to the USA: [...]

  14. rfk says:

    the market is a wee bit frothy.

    What $113,000 over asking gets you in Toronto’s Leslieville

    I’ve heard it not just the Chinese, big money is coming in from the mid-east, Russia and Europe creating an unvirtuous self reinforcing feedback cycle.

  15. victor says:

    To boot, in Canada the longest term for which a mortgage rate can be fixed is typically no more than ten years, while mortgage maturities are commonly 25 years. Go figure…

  16. sakhalinsk says:

    Does anyone have the same stats (govt; family/personal debt) for the UK to hand? Or can point towards a reliable link? I suspect the UK is still indebted to the eyeballs… Thanks!

  17. “Household Debt” and “Household Income” can hide a lot of demographic disparity. It would be very enlightening to see this broken out by income brackets.

    Also worth noting, per the TD report linked above, is that Homeowner’s Equity as % of real estate value in Canada remains at 70%, vs. US being at current 50% (after dipping below 40% in 2008-2010 timeframe and relative to 1990s-2005 trend around 60% but down from prior ~70%).

    The TD report also shows that mortgage interest payments in Canada have been proportionately lower relative to income, with the U.S. only just catching down. Both nations show at ~4%. Obviously that’s going to conceal a wide range of variability.

    It’s hard to reconcile high debt/income with high home equity, unless RE prices are also sky-high!

  18. formerlawyer says:

    Given the non-deductabilty of mortgage payments in Canada of mortgage payments for income tax purposes vs. the U.S. how does that factor into this analysis?

    • contraguy says:

      Absolutely it does, or at least it should, but as it is difficult to quantify, few people who want to produce such an analysis will take it into account. It’s the main reason that home owners’ equity is about 70% of the total value of houses in Canada, or to turn that around, on average, mortgages make up just 30% of that total value.

      In Ontario and Quebec, the top marginal tax rate on earning interest is about 49%. On a bond earning 4%, that means the after tax income is about 2%. As interest on mortgagtes is not tax deductible, an investor paying down a mortage at 5.5%, gets the full return of that 5.5%. To put it another way, an investor would need a return of 11% on a bond to do as well!

      Of course, none of this is stay that house prices aren’t expensive or that Canadians have too much debt. However the CONSEQUENCE of a reduction in housing prices is different in a country where mortgages are not tax deductible and homeowners have a high proportion of equity, compared to countries where it is tax deductible, so it makes sense to carry a large mortgage when interest rates are low.

      • Keep in mind that the 49% also pays for alot of things that in the USA cost extra (health care, unemployment, school, etc) — its an apples to oranges comparison

  19. pekoe says:

    People who have defaulted on their debts have excellent debt to income ratios. Does not mean the economy is healthy.

    • Fractions such as “Household Debt-to-Income Ratio” have 2 parts to them — its not just the numerator — the number of defaults that matter — but the denominator, or income is just as important. Lots of lost jobs and flat income is just as much to blame for this divergence versus Canada . . .

  20. contraguy says:

    Oh for sure, higher income tax rates pay for a lot of stuff, and keeping in mind that is only at the marginal rate, so the average tax rate is much lower, and you only hit that top bracket if you are in the comfortable middle class anyway. But my point is that the Canadian tax system encourages homeowners to dump extra cash into their houses and build equity, which changes the reaction to a decline in home values.

    If I have a $1m home, $500k equity, and $500k mortgage, and housing prices go down 20%, I have lost $200k, and I’ll be unhappy about that, but it just doesn’t change my situation much. Best thing to do is just keep paying the mortgage and living there and hope the price rebounds at some point in the future. However, if I’m in the same house, and I have $50k equity and a $950k mortgage, and the value goes down to $800k, then I’m likely to want to get the hell out of there. It’s that self-reinforcing action which makes price declines so destabalizing when most of the asset is debt. So while debt is debt, its relationship to equity is also important, and if that is very different, then indeed it will be an apples to oranges comparison when assessing overall debt levels.

  21. ian1 says:

    I agree that interest rates play a huge factor. I think its more about affordability than equity. If rates go up and people a) can’t afford new mortgages or b) can’t afford existing mortgages then housing supply will increase. The arguments above are that, based on the strength of the buyer, there will be little forced selling in Canada. I would argue against this for the following reasons. 1) the employment picture in Ontario is questionable 2) price weakness may create tremendous fear among retirees 3) housing plays a huge part of Canada’s GDP 4) foreign investors may pull out quickly 5) a natural demand decline in response to corrections 6) depletion of less prudent homebuyers 7) positive feedback loops in all of the above.