The BoC’s Coté On Risk & Household Debt

Measuring RiskSince the credit crisis, the Bank of Canada has stepped up efforts to quantify the risk lurking in our financial system.

Deputy Bank Governor Agathe Côté spoke about this Tuesday. She explained how the BoC models risks and provided the following factoids on Canadians’ debt exposure.

She said:

  • “…While record-low interest rates in recent years have contributed to a relatively low aggregate household debt-service ratio, the share of Canadian households that are considered most vulnerable – those with a (total) debt service ratio equal to or higher than 40% – has climbed to above-average levels, as has the proportion of debt held by these vulnerable households.”
    (The proportion of indebted households with debt-service ratio ≥ 40% was just about 6% on Dec. 31, 2011. Just for perspective, the maximum allowable debt ratio on a standard mortgage application is 44%.)
  • Rising-rate-riskIf interest rates were to rise to 4.25% by mid-2015, then:
    • the share of highly indebted households would rise from slightly above 6% in 2011 to roughly 10% by 2016
    • the proportion of debt held by these households would rise from 11.5% to about 20% over the same period.
  • “…Household loans in arrears would more than double under a severe labour market shock similar to that observed in the recession of the early 1990s.”
    (That said, double the latest 0.34% arrears rate would still be far less than the modern-day high of 1.02%. The BoC also admits that its models don’t assume that distressed households will sell their homes to avoid default—a realistic option for indebted families with marketable homes and sufficient equity.)
  • Research shows that combining real estate prices and the credit-to-GDP gap (i.e., the difference between private sector credit and its long-term trend) provides “among the most reliable indicators of financial stress.”Here’s a chart showing the credit-to-GDP gap:


(Click chart to enlarge)

And here’s a familiar graph of Canadian home prices, which have been riding the up escalator for more than a decade. Source: Teranet & National Bank.


(Click chart to enlarge)

The full text of Côté’s speech is available here.

Rob McLister, CMT

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  1. Comment avatar

    just some guy    

    IMO if your total debt ratio is over 40% it’s a lot safer for you to rent.

  2. Comment avatar


    nah… just go for it!
    My realtor told me house prices only go up. In case you haven’t heard, there is a land shortage in Canada.
    So, stop throwing away money, get on the home buying train now or be priced out forever.

  3. Comment avatar

    Susan b    

    While debt service ratios are an important criteria there is an underlying factor which bears consideration and that’s ability to pay- how much is leftover after expenses to pay for living needs based on lifestyle , family size, age savings, education to name a few .

  4. Comment avatar


    They say sarcasm is the lowest form of wit. Now I know why.

  5. Comment avatar

    Too Naive    

    Of course they said that.. It’s their job to convince you to buy…
    probably made a nice commission off you

  6. Comment avatar

    Crazy Canuck    

    Yeah – try telling that to the poor sap who has the whole world telling him/her otherwise and also has his/her in-laws silently labelling ‘failure’ oN their renting son/daughter in-law.
    Although I’m usually in support of the ‘buy’ side of the argument, I don’t blindly discredit the merits of the ‘rent’ side of the die.

  7. Comment avatar

    Kyle Green    

    Only 10% of people will be over 40% TDS if rates go to 4.25%? That’s not bad, in my opinion. This is probably why the changed the max amortization, so that mortgages are paid down more quickly so in the event of default and foreclosure, at least there is equity in the property.

  8. Comment avatar


    If the intent of sarcasm is to be witty, then maybe that’s correct but it can be pretty effective in making a point.

  9. Comment avatar


    Although TDS is a good ratio to qualify people into mortgages, if rates go to 4.25% in mid-2015, it ignores that there are lots of people currently in 5yr 3% fixed rate mortgages. They will continue to pay down principle until the mortgage is up for renewal. At this point, people that are stretched thin could simply lengthen their amortization period back up 5 years to lower their monthly payments. Although not ideal to pay off the mortgage, it provides a little breathing room for some in a pinch.

  10. Comment avatar


    Is that a common thing to do? Honestly curious.
    Maybe this is why the HELOC rules changed. One could arrange to do this without the bank by paying a bit of the mortgage every month out of the HELOC, leaving the amortization stagnant.


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