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  • Gene Vihodsef

COVID-19: Second Wave Brings Uncertainty on Household Debt

Updated: Feb 18





The COVID-19 pandemic has changed the household debt picture, at least for the time being. The debt-to-income ratio is a key indicator of debt as a vulnerability of the financial and housing sectors. The household debt-to-income ratio decreased in all major Canadian metropolitan areas between April and June. Under normal circumstances, such a decline would signal a general improvement in households’ ability to pay off debt. Indeed, temporary government transfers effectively supported income losses. This most likely helped with reducing outstanding non-mortgage debt during those months. However, the mortgage part of household debt has increased in most metropolitan areas while employment has contracted.

Since entering the second wave, there has been great uncertainty regarding households’ ability to continue servicing their growing mortgage debt. It is crucial to study the dynamics of household debt, income and savings in Canada. This will allow for the assessment of the potential risk of rising delinquencies on mortgages and other credit products.

Key Findings in Canada

  • Q2 household debt is 17% down from the Q1 at 158% of disposable income

  • debt-to-income ratio had not significantly deviated from 175% since 2016 (see figure 1)

  • debt-to-income ratio for mortgage debt was also down, falling from 115% to 105%

  • debt-to-income ratio decline was a direct result of an increase in household disposable income (the level of outstanding debt was largely unchanged)

  • on average, disposable income grew by nearly 11% between the Q1 and Q2 of 2020 and by 15% year over year (this important income surge reduced the household debt-to-income ratio to a level last seen in 2010)

Household debt well supported by a temporary income surge


Canadian debt-to-income ratio declined to levels not seen since 2010 Sources: Statistics Canada, CMHC calculations.

The boost in disposable income can be explained by the government’s assistance programs that supplemented Canadian’s incomes during the quarter. The Canada Emergency Response Benefit program contributed to an increase of approximately $50 billion1 in household income by June 30th. This equals roughly 13% of households’ primary income during the same period. In fact, households’ primary income decreased by a seasonally adjusted 7.4% in Q2 of 2020 (relative Q1). This was before accounting for all the current transfers received from the government, corporations and non-profit institutions We can suppose the Canadian debt-to-income ratio would have seen a slight increase without the COVID-19-related income support.

Household debt-to-income in major CMAs: different versions of the same story The situation in metropolitan areas mirrors that at the national level. The debt-to-income ratios in all major census metropolitan areas were significantly lower in Q2 of 2020. This is compared to the same period in previous years and for both mortgage and non-mortgage debt.

Key Findings in Census Metropolitan Areas

  • Compared to Q1 of 2020, the debt-to-income ratios saw the largest declines in Vancouver, Victoria, Regina and Montreal. All 3 cities were all down by over 20 percentage points. These markets were also among the ones exhibiting high disposable income growth in Q2.

  • Calgary and Edmonton had the smallest declines in their debt-to-income ratios among all major census metropolitan areas. This was true for both mortgage and non-mortgage debt.

  • In Alberta, low oil prices and the COVID-19 lockdown reduced the average household primary income by over 7% from April to June. This is excluding government transfers.

  • Despite these generalized declines in debt relative to income, Vancouver and Toronto’s debt-to-income ratios, at 210% and 203%, respectively, remained way above the Canadian average of 158%. These differences were almost entirely due to the elevated mortgage debt. The mortgage debt-to-income ratios stood at over 140% in Vancouver and Toronto. These levels were materially higher than the Canadian average of 105%. Moreover, these large mortgage markets continued to see growth in mortgage debt in the second quarter.


All major CMAs observed meaningful declines in debt-to-income ratios in the second quarter of 2020 (Sources: Equifax, Statistics Canada, Conference Board of Canada, CMHC calculations)

Higher income increases drive DTI ratios down (2020Q1 – 2020Q2)

Excess household savings offer a sizable financial buffer, while uncertainty remains This temporary increase in income has allowed households to build up their savings. Because of a cutback in spending, the household net savings rate jumped to 28.2% (figure 4). To put this number in context, the average savings rate is 3.7% since the global financial crisis. Households across Canada saved close to $100 billion during Q2 of 2020,2 around 10 times the pre-COVID-19 level. The excess savings resulting from government transfers and less spending could provide households a sizable financial buffer going into Q3.


Household net savings saw a spike in the second quarter because of an increase in income and a cutback in spending (Source: Statistics Canada)

The higher savings rate could be a sign of increasing concerns among households about the economic recovery and income prospects. Part of the reduced spending is due to consumers’ inability to spend, for example, business closures and mobility restrictions. This is especially the case for expenditure on services. This historically high savings rate is also a result of consumers’ unwillingness to spend as a response to future uncertainties. Restrictions will wear off once the epidemiological situation gets better , whereas uncertainty will likely to linger for longer and dampen consumer demand in the longer term. As of Q2, we have not yet seen a drastic change in household debt levels. However, with increasing uncertainties, the lack of demand could affect the speed of economic recovery and hence change the household debt and income picture over the coming months.


Disclaimer: The above article on household income and debt is provided by the CMHC.

Thank you,

Gene Vihodsef