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Over 82% of Toronto’s Household Debt Is Tied To Residential Real Estate

Toronto real estate pushed to new highs, bringing the city’s debt level with it. Breaking down the Canada Mortgage and Housing Corporation (CMHC) numbers from yesterday, we can see where Toronto spends its cash. In Q2 2018, over 80% of Toronto Census Metropolitan Area (CMA) debt was tied directly to the value of real estate. The high level of debt, and attachment to real estate, makes Toronto the second most vulnerable in the country, when it comes to rising interest rates.

Debt to Income Ratios

The debt to income (DTI) is a measure of debt, and tells us a lot about households in a region. The DTI is the ratio of debt in contrast to the amount of disposable income households have. The higher the DTI, the more debt households have, relative to their income. The lower the ratio, the lower debt they have relative to their income. Ideally, you want to see this ratio taper, while the economy is booming. That is, unless you’re a central bank trying to stimulate the economy with cheap debt.

High DTIs might seem manageable, but there’s quite a few problems with it. When accumulated at low rates, these borrowers are certain to see servicing costs rise. Since their debt service ratio is already high, a rise in rates can push these households to their limits. Best case scenario, these households slow down consumption. The slowing of consumption, especially when tied to a region, can have a big impact on a local economy. Less consumption means lower GDP. A drop in GDP can mean a decline in employment, stalling wages, or even recession. Not a sexy best case scenario, is it? On that note, let’s break these numbers down.

Toronto Households Owe $2.08 For Every $1 They Earn

Toronto households owe a whole lot cash, even when slightly higher incomes are factored. The DTI ratio is 208.08% for Toronto CMA at the end of Q2 2018, up 10.2% over the past 3 years. To put it another way, Toronto households owe $2.08 for every $1 of disposable income they earn.



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