Well, I’d assume there are people in Toronto (and Vancouver, and … Calgary?) making under $100k buying at least $500k houses/condos … and mortgaging at least $450K of that. Even after a few years of servicing that debt, they would still be at at least 200% … assuming no other debt.
Or am I getting something wrong here?
American here. We own our house and a minivan, all paid off; I lease the car I use for day-to-day commuting and can easily make the monthly payments. We pay all of our credit cards every month. I also have some savings I can draw upon. Our investments have taken a beating in the past nine years, but all in all we’re doing OK, while knowing many who aren’t.
Okay - SFQ time. Any time I’ve ever seen “Debt to income ratio”, it has been relating to a debt service ratio… or percent of your income that services the debt. This can’t be that, right? Is this one calculated the way I thought? IE - If I make 100K/yr and I owe a total of 148K (mortgage, loans, etc) - then my ratio is 148% … correct?
Looks right to me. Which puts mine at about 220% right now.
ETA: and that’s using gross income. I’m guessing it reaches 400% if you account for all levels of taxation. (Property, Sales, Income, etc.)
That’s true, but if you’re looking at a national average, then you also have to look at the east coast where my friend, a contractor, bought a house with his credit card. We spent more having him help us renovate than he did on the entire house he just bought.
Housing prices here are stupid. We were looking at houses in our neighborhood and were horrified by a severely termite-damaged place. I’m not kidding, the entire back half of the house will have to be demolished if it’s still standing when they take possession. We were actually really worried about the neighbor (it was a semi-detached) because if that back half collapses, her house is going with it. It sold for almost $600K.
Well - assuming I’m correct, we’re bringing up the average, but had an employment anomoly like LeafFan’s plus are at a time in our lives where everything is all about spending…
Sorry, Leaffan, I should have specified too that I wasn’t talking about people who have held on by the skin of their teeth in bad circumstances, but rather people who are just spending on credit frivolously because they can, without seeming to realize that those chickens are going to come home to roost.
I’m not entirely sure if mortgages are included in this or not. If they are, I’m not sure if they are including the whole amount owed, or what your monthly payments are. More research required…
It looks like your mortgage is not usually included: From this site:
Okay, that kind of makes more sense. Otherwise the numbers would be skewed in a crazy way, depending on where you live.
That’s crazy! There are people out there who owe 1.5 times more on personal/car/home equity loans, and credit cards than they make gross in a year? Not including mortgage?
OK. I feel much better about my situation if that’s the case.
This is just what I came in to say Mortgages are generally not included in "household debt.
And yes, Leaffan, not only are there people out there who owe 1.5 times their disposable income on stuff other than house mortgages, but this is the AVERAGE, so there are plenty of people who owe more.
Some of this debt may also be on 2nd or “vacation” properties as well as on cars, credit cards and lines of credit.
As someone with 0 household debt, this boggles my mind. Someone out there must have 3 times their household disposable income in debt just to make up for me. (disposable income is generally defined as after tax income)
Okay - here’s an interesting thing. I wasted some time looking at some Stats Canada stuff … while it is still available…
A question - how realistic would it be to assume that the average Canadian’s debt total (including mortgage) is 50% of the value of their house?
This can’t be right… if it is, I’m doing okay, but scared of what’s going to happen when interest rates go up - which is the only way they can go.
The Governor of the Bank of Canada ALWAYS uses the most conservative, tight-lipped language possible as his words have such an effect. You could argue him actually saying something substantial is akin to it being screamed from the mountaintops
If the figure in the OP’s article doesn’t include mortgage debt, nothing else in the article makes any sense.
Specifically, the bulk of the article discusses the impact of mortgages:
…
If three-quarters of Canadian’s debt is mortgages, and the 1.5 figure doesn’t include mortgages - then you have to multiply that 1.5 times four to get the total debt load … am I right? That would create the absurd result that Canadians on average owe six times gross income, mortgage plus non-mortgage debt. Which just can’t be right. Also, since assets exceed debts by 4 to 1, the average Canadian owns assets worth 24 times their gross income - which is obviously absurd.
OTOH, if the figures do include mortgages, they are simply not all that alarming. In major Canadian cities, owing more than 1.5 times gross income in mortage is hardly unusual. In Toronto, the average house goes for something like $400,000, for a small three-bedroom …
I agree that this “debt-to-income” ratio appears to include mortgage debt.
Which makes it not very useful, but still troubling that it has increased 7% in a year.
It’s worrisome all right, but at least according to the article, the explaination for much of it is a sudden drop in income. Since much of the debt is “fixed”, a sudden drop in income cannot be compensated easily by an equally-sudden drop in debt.
There was some story we saw within the last week on either “The National” or some other CBC show, in which they interviewed some immigrants to Canada and discussed credit.
They were from a country where credit essentially doesn’t exist for the average person. Oh, it exists, but it wasn’t really a part of their consumer culture. If you want to buy a house, you save up until you can then buy a house and own it outright. If you want a bicycle, you save up and buy a bicycle. You didn’t use credit for the purchase.
So the family they were interviewing was really interesting. The kids are college students who grew up here in Canada. While they understand how evil credit cards can be, they don’t hesitate to use them quite liberally. The one guy is a student and there is just no way he has the income to cover his purchases. I was actually really interesting to hear the kids talk very rationally about how credit was perceived and (not)used in their parent’s culture, and how using their credit cards all the time for purchases they otherwise can’t afford is creating a huge mess, yet at the same time, they didn’t seem to be modifying their purchasing habits. The student has a nice new car, the latest technology gadgets, and utterly no way to pay for it.
Terms have not been very well defined in any of the news articles I have read about this. By doing some digging, I THINK that I was wrong above, and I THINK these are the definitions being used: (but it is not that clear)
Personal Debt = amount owing on credit cards, line of credit, car loans, etc
Mortgage Debt = amount owing for a home you live in
Household Debt or Total Debt = the amount of personal debt and mortgage debt for everyone in a household
Disposable Income = Income after paying income tax, CPP and EI
Debt Load = ratio of total debt to disposable income
Therefore, when they talk about the average household debt load being 148%, they are INCLUDING mortgage debt. This does not seem so crazy then. The vast majority of this debt will be mortgage debt.
Doing some numbers, and looking at house prices, I can see some sense of this number including mortgages. The median gross family income in Vancouver in 2008 was 68,710. The average house price was 679,000. If they owned half their house and mortgaged the rest, their debt to income ratio with no other debt is already at around 500%. Using the same assumptions for Toronto (300%), Calgary (225%) and Montreal (230%) would explain the variance with those with paid of mortgages and those who could buy a house with a credit card out east.
Totally agree this is a pretty unalarming statistic. My household has a debt to income ratio of over 200%. But it’s still in good financial shape: the net worth is positive, and the asset-to-debt ratio is I’d estimate heading towards two because all of that debt is a mortgage (for less than the current house value).
But Pylon’s numbers look screwy for Vancouver. How can an income of $70,000 afford a $680,000 house? Oh, wait, median income but average (I assume mean) house price. Nice little lesson in the difference between mean and median, and how a few very large items can skew the mean high, when the median still stays low.