Canadians are expected to keep piling on more debt, even in the face of a long-anticipated increase in interest rates, taking household financial vulnerability to levels never seen before, a new report from the Parliamentary Budget Office says.

Household indebtedness hit 174 per cent in the first quarter of 2017, according to the PBO. That means Canadian households owed $174 for every $100 in disposable income.

That indebtedness ratio "increased sharply over 2002 to 2011" before evening out at about 170 per cent in early 2015. Then it started rising again. The budget watchdog expects household indebtedness to hit 180 per cent by the end of 2018.

Financially vulnerable households

Policymakers are particularly concerned about Canadian households' debt service ratio, which measures the principal and interest payments that households are obliged to make against household disposable income.

That ratio, which is considered an indicator of households' ability to service debt, is used to measure how vulnerable households are to economic shocks like unemployment or interest rate hikes.

In the first quarter of this year, Canadian households owed $14.20 in principal-and-interest payments on debt for every $100 in disposable income, according to the Parliamentary Budget Office. That number has increased slightly from mid-2015, and is projected to increase further: the PBO expects it to hit $16.30 per $100 by the end of 2021.

"Despite a projected rise in interest rates, we expect household indebtedness to increase due to continued gains in real house prices and elevated levels of consumer confidence," wrote the PBO.

The future ability of Canadian households to service their debt "will become stretched even further as interest rates rise to more 'normal' levels over the next five years," says the report.

"Based on PBO's projection, the financial vulnerability of the average Canadian household would rise to levels beyond historical experience."