BUSINESS

Canadians' Debt Headed For ‘Levels Beyond Historical Experience': PBO

06/20/2017 02:10 EDT | Updated 06/20/2017 19:55 EDT

The warnings about Canadians taking on too much debt have been growing louder and more frequent lately, and the federal Parliamentary Budget Office (PBO) is adding its voice to the chorus.

If interest rates rise as projected in the next several years, Canadian households will be spending more of their paycheques paying down their debt than at any time in records going back 27 years, the PBO said in a report issued Tuesday.

Currently, the average household pays 14.2 per cent of its disposable income towards debt, the PBO estimated. Even though that is already elevated compared to historical norms, the debt service ratio, as it's known, will rise to 16.3 per cent by 2021, the budget watchdog predicted.

"Based on PBO's projection, the financial vulnerability of the average Canadian household would rise to levels beyond historical experience," the PBO stated. In other words, we don't know how this will turn out, because we've never had this much household debt before.

household debt service ratio

The Parliamentary Budget Office predicts the share of disposable income that Canadians spend on paying down debt will hit a record high in the coming years.

And the PBO predicts Canadians will continue to take on more debt, thanks to rising house prices and "elevated levels of consumer confidence."

For years, declining interest rates helped Canadians' debt payments stay in check, even as house prices rose aggressively. But the PBO says this is no longer the case — interest rates are near bottom, and as house prices rise, debt costs are rising.

The PBO's projections are based on an expected return to "normal" interest rates, in this case a return to a three-per-cent key lending rate at the Bank of Canada, which the PBO expects will happen by mid-2020. The Bank of Canada rate is currently at 0.5 per cent.

Interest rates could rise sooner than expected

But with Canada's economy firing on all pistons and job growth stronger than expected, Bank of Canada governor Stephen Poloz has hinted interest rate hikes may come sooner than expected.

Canada's low interest rates, put into place after the oil price collapse of 2014, have "done their work," Poloz recently commented.

As recently as several weeks ago, most analysts predicted that interest rates would start rising in Canada in 2018. Many have now shifted their expectations, predicting rates could start rising as early as October, with even a possibility of a rate hike next month.

That's a clear sign now is the time for consumers to get their financial houses in order. Either that, or face debt payments of historic proportions.

Also on HuffPost

Canada's Best Cities With Houses Under $400K