Why we shouldn’t worry about debt-to-income record

by Justin da Rosa17 Mar 2017
One big bank is arguing the debt-to-income ratio is the most “useless economic indicator out there.”


You’ll read a lot about these two numbers in the coming days. That’s the debt to income ratio for all Canadians and it just hit a new high in Q4 of last year.

It’ll be whipped out when arguing against mortgage debt and for policies aimed at safeguarding Canadians from taking on even more debt.

But it isn’t that simple, according to Benjamin Tal, chief economist with CIBC. And the ratio isn’t even that useful.

“The attractiveness of the ratio is that it’s simple —one number catches all. But as we all know, the cost of simplicity is, at times, very high. The ratio compares the stock of debt to the flow of income,” Tal wrote in response to the release of the figure. “You are not required to pay off your mortgage in one year, so on that ground, that approach is faulty.

“It’s also the debt of people with debt, relative to the income of people with and without debt. Again a suboptimal comparison. And if foreign income plays a role in the housing market (and it does) that income is not part of the calculation.”

Still, news organizations jumped on it.

“Canadian households owed $2 trillion at the end of 2016,” the CBC proclaimed.

“Debt-to-income hits fresh record,” Reuters said.

But while debt-to-income levels seem frightening, CIBC argues it’s anything but.

“In many ways this ratio is designed to rise. In the past 25 years, the debt-to-income ratio fell only twice,” Tal wrote. “In a normally functioning economy, debt will rise faster than income.

“For the ratio to fall notably you need a significant shock such as the US financial crisis which led to the US debt-to-income ratio falling from over 160% to 140%,” he continued. “Is the ratio rising too fast? Not really. Total real household debt is now rising by just over 4% (year-over-year)—a rate that is in line with the performance seen during the jobless recovery of the 1990s.”


  • by Dick Brady 3/17/2017 7:30:18 PM

    Of course we shouldn't worry about a debt to income ratio of 1.67 - the Ontario Liberal Government doesn't worry about a debt to income ratio so why should the average plebeian worry. The Banks don't worry because they have the necessary back up equity to cover the loan and the Provincial Liberals have us the people to tax to death. However, the debt is so high that any change in the interest rate will cause certain disaster with the individual borrower. In the case of the Provincial Government(?) they need not worry about a lower credit rating causing a
    larger payback because they simply tax us more, but the individual Canadian.....????
    . A horrible situation.

  • by Lawrence Kobescak 3/18/2017 12:35:05 AM

    That's an insightful point Benjamin.

  • by MAYBE 3/18/2017 4:39:24 AM

    The governing parties do not worry about their debt ratio because they personally don't have to pay for it. Their incomes and pensions, are determined by their own votes. Unlike most working people whose wages and number of hours worked are determined by employers and economic conditions. Government debt is dependent upon how much income tax is expected to be collected in the years ahead. Income tax is only used to pay the interest on government debt. It does not support education, health care, or any social services or infrastructure. The foregoing are supported by other taxes e.g. fuel, alcohol, sales, licensing, fines, property and possibly some of the debt. The next step is the privatization of our water, sewers, garbage dumps, roads, hydro systems, etc. just like the third world countries. Debt is the same for governments as it is for individuals, when we sell RVs, boats, motorcycles, and other things of value in order to maintain financial comfort. Problem is that we feel the strain long before the governments or individuals who own our resources and infrastructure.

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