TD Economics offers first glimpse of financial vulnerability at regional
TORONTO, Feb. 9 /CNW/ - The first index to rank the financial
vulnerability of households by province was published today by TD
British Columbia, Alberta, Ontario and Saskatchewan households were
found to be at greatest risk to negative economic events such as a
substantial correction in housing prices, a major disruption in incomes
or an unexpected large increase in borrowing rates. Manitoba
households are least vulnerable. The Atlantic region and Quebec fall in
between. Detailed provincial assessments are included in Assessing the
Financial Vulnerability of Households Across Canadian Regions (www.td.com/economics).
The probability of one or more of these negative events occurring in the
coming years is relatively low according to TD Economics. However, the
Household Vulnerability Index does note that risks related to household
finances have been rising broadly across all regions over the past few
years, and with higher interest rates on the horizon set to boost the
cost of servicing debt, this upward trend in vulnerability is almost
certain to continue.
"The focus nationally on household debt has raised questions about which
regions face the most significant challenge," according to Craig
Alexander, TD's Chief Economist and co-author of the report. "This new
index does not predict events, but it does shed light on those
provinces that are most susceptible to downside risks."
Since 2007, the increasing vulnerability has reflected in large part the
rising trend of household debt relative to income across the country.
This development is an indication of the strength in housing markets
and real estate related borrowing. More recently, however, there has
been growing evidence that many Canadians have been turning to credit
as a way to finance consumption rather than invest in their homes.
Despite rising indebtedness, home price increases have supported the
asset side of the personal balance sheet ledger. Even more importantly
the falling cost of borrowing has been pulling down the share of income
households have been shelling out to service obligations. Low interest
rates have also helped to keep a lid on the share of vulnerable
households in recent years. As such debt-service ratios have been
falling and remain in a comfortable range.
TD Economics' Household Financial Vulnerability Index takes into account
six key metrics of household financial position. TD Economics assigns a
weight to each metric based on perceived importance. Metrics include
debt-to-income ratio (combined total of residential mortgages, lines of
credit and other consumer loans as a percentage of personal disposable
income); debt service ratio (interest and principal payments as a
percentage of income) and the proportion of households with a debt
service ratio of 40 percent or higher.
SOURCE TD Economics
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