Canada Pushes Rates To 22-Year High
The Bank of Canada pressed ahead with another rate hike on Wednesday, the second consecutive coming off a two-meeting pause.
Developments in Canadian monetary policy don't always make for the most compelling reading (and my Canadian audience will kindly note that isn't meant as a slight), but the evolution of Tiff Macklem's tightening campaign is important to monitor.
Last month's hike from the BoC mirrored the resumption of rate increases in Australia, where the RBA was likewise compelled to
What does the debt to disposable income compare? Monthly debt payments to monthly income or total debt to total annual income?
The debt-to-disposable income ratio is a financial indicator that measures the level of debt burden on individuals or households in relation to their disposable income. It provides insight into the ability of individuals to service their debts and manage their financial obligations.
Disposable income refers to the amount of income that individuals or households have available for spending and saving after deducting taxes and other mandatory expenses. It represents the portion of income that can be used for debt repayment, consumption, or savings.
The debt-to-disposable income ratio is calculated by dividing the total debt outstanding by the disposable income of individuals or households. The formula is as follows:
Debt-to-Disposable Income Ratio = Total Debt / Disposable Income
For example, if a household has a total debt of $50,000 and a disposable income of $60,000, the debt-to-disposable income ratio would be:
$50,000 / $60,000 = 0.83 or 83%
A higher debt-to-disposable income ratio indicates a greater level of debt burden relative to the income available to service that debt. This can be an indicator of financial stress and may suggest a higher risk of defaulting on loan payments. Conversely, a lower ratio indicates a more manageable debt level compared to income.
When discussing a country’s debt-to-disposable income levels, the calculation is done at a national level by aggregating the total debt of households and dividing it by the disposable income of all households within the country. It provides an indication of the overall debt burden of the country’s population and their ability to manage their debts collectively. This ratio is often used as a measure of the financial health and stability of a nation’s households and can be helpful for policymakers and economists in assessing economic risks and formulating appropriate policies.
What is important to note for Canada is that their mortgage rates are not set for 15-30 years as they are in the US. The amortization may be calculated for a long period of time but the rate is typically only locked in for 5 years (estimated average). This means when they go to renew their mortgage rates in the next year or two, they will either need to increase their amortization period again (back to 30 years for example), go with an interest payment only plan, or perhaps even sell and go somewhere cheaper. It might put a bit of needed pressure on the housing market in the two main markets.
Yet Canadian banks continue to hold up. Could US bank structure and regulation learn some lessons from its saner neighbor?