Household debt across Canada slightly increased in the third quarter. In Vancouver and Toronto, this could spell disaster.
According to the Canada Mortgage and Housing Corporation (CMHC), the debt to disposable income ratio in both cities exceeds 200 per cent. The national average is near a record high at approximately 170 per cent.
"Households with elevated levels of debt are more vulnerable to increases in interest rates,"CMHC said in a statement. "With interest rates on the rise, highly indebted households could see their increased required payments exceed their budgets."
Vancouver and Toronto have the highest debt-to-income ratios at 242 and 208 per cent, respectively.
“Currently, the delinquency rates are extremely low in both Toronto and Vancouver, which indicates that, at the moment, households—even though they may be highly indebted—are able to service that debt without significant difficulties,” Brent Weimer, senior specialist in socio-economic analysis at CMHC said in a statement.
But even with these low rates, the CMHC warns rising interest rates increases vulnerability for homeowners with high-levels of debt.
Increased debt payments can lead to less consumption, decreased savings and smaller repayments on principal amounts, the CMHC warns. "Some households might even default on their loans if their incomes are not sufficient to cover higher expenses and credit charges."
The Bank of Canada has increased interest rates five times since summer 2017. More hikes are expected in the new year.