Higher Rates Hitting Households
- Keywords:
Canada’s household debt-to-income ratio rose 2.8 ppts to 184.5% in Q1 (seasonally adjusted), from an upwardly revised 181.7% in the prior quarter and just off last year’s record highs. The unadjusted ratio dipped 0.55 ppt to 180.5%. On an adjusted basis, disposable incomes fell as government transfers receded and interest costs rose, with both factors more than offsetting the gain in compensation. Meantime, borrowing rose at the slowest pace since 2003 aside from the pandemic blip. Growth in mortgage loans was the lowest in 20 years as the Bank of Canada hiked rates once in the quarter before pausing. Looking ahead, the recovery in the housing market likely helped mortgage demand rebound in Q2, but the return of tightening could weigh in the following quarters.
The household debt service ratio (interest and principal as a share of disposable income) rose from 14.4% to 14.9% in Q1, the highest since 2019 and just a tick below the all-time high posted in 2007. The increase was driven by rising debt payments, which are expected to climb further in the coming quarters.
Meantime, household net worth rose to 1001.6% of disposable income, ending a string of three quarters of decline. Rising equities, and the recovery in the housing market, pushed up the value of household net worth. On the second point: owners’ equity in real estate increased from 73.5% to 74.3% in Q1 and is poised to recover further in the next quarter amid rising home prices.
Meantime, government debt ratios continued to improve thanks to higher nominal activity. Gross general government debt (includes all levels of government) ticked down one ppt to 124.9% of GDP, though it remains about 10 ppts above pre-pandemic levels. Net debt stepped down 0.7 ppt to 25.3% in Q1, in line with its pre-pandemic range.
Key Takeaway: Lower disposable income led to a deterioration in household debt ratios in Q1 despite a slowdown in mortgage demand following the Bank of Canada's aggressive rate hike campaign. Meantime, elevated interest rates are pushing debt service costs higher, which are poised to climb further in the coming quarters as the BoC raised policy rates again in June. That will likely act as a notable headwind on consumption and broader economic growth through the rest of this year and into 2024. Household debt remains a key vulnerability to the Canadian economy, and one that the Bank will watch closely as it determines how much more tightening is required this cycle.
Table 1 - Canada — National Balance Sheet Accounts
(percent)
| 23Q1 | 22Q4 | 22Q3 | 22Q2 | ||
|---|---|---|---|---|---|
| Credit Market Debt to Disp. Income | (s.a.) | 184.5 | 181.7 | 184.7 | 183.1 |
| (n.s.a) | 180.5 | 181.0 | 183.3 | 182.8 | |
| Net Worth to Disposable Income | (n.s.a) | 1001.6 | 971.9 | 981.5 | 1013.3 |
| Debt to Total Assets | (n.s.a) | 15.4 | 15.9 | 15.9 | 15.4 |
| Homeowner Equity | (n.s.a) | 74.3 | 73.5 | 74.0 | 75.5 |
| Total Gross Government Debt to GDP | (n.s.a) | 124.9 | 125.9 | 127.0 | 130.0 |
| Total Net Government Debt to GDP | (n.s.a) | 25.3 | 26.0 | 26.4 | 28.4 |
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Shelly Kaushik
Economist
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Canada’s household debt-to-income ratio rose 2.8 ppts to 184.5% in Q1 (seasonally adjusted), from an upwardly revised 181.7% in the prior quarter and just off last year’s record highs. The unadjusted ratio dipped 0.55 ppt to 180.5%. On an adjusted basis, disposable incomes fell as government transfers receded and interest costs rose, with both factors more than offsetting the gain in compensation. Meantime, borrowing rose at the slowest pace since 2003 aside from the pandemic blip. Growth in mortgage loans was the lowest in 20 years as the Bank of Canada hiked rates once in the quarter before pausing. Looking ahead, the recovery in the housing market likely helped mortgage demand rebound in Q2, but the return of tightening could weigh in the following quarters.
The household debt service ratio (interest and principal as a share of disposable income) rose from 14.4% to 14.9% in Q1, the highest since 2019 and just a tick below the all-time high posted in 2007. The increase was driven by rising debt payments, which are expected to climb further in the coming quarters.
Meantime, household net worth rose to 1001.6% of disposable income, ending a string of three quarters of decline. Rising equities, and the recovery in the housing market, pushed up the value of household net worth. On the second point: owners’ equity in real estate increased from 73.5% to 74.3% in Q1 and is poised to recover further in the next quarter amid rising home prices.
Meantime, government debt ratios continued to improve thanks to higher nominal activity. Gross general government debt (includes all levels of government) ticked down one ppt to 124.9% of GDP, though it remains about 10 ppts above pre-pandemic levels. Net debt stepped down 0.7 ppt to 25.3% in Q1, in line with its pre-pandemic range.
Key Takeaway: Lower disposable income led to a deterioration in household debt ratios in Q1 despite a slowdown in mortgage demand following the Bank of Canada's aggressive rate hike campaign. Meantime, elevated interest rates are pushing debt service costs higher, which are poised to climb further in the coming quarters as the BoC raised policy rates again in June. That will likely act as a notable headwind on consumption and broader economic growth through the rest of this year and into 2024. Household debt remains a key vulnerability to the Canadian economy, and one that the Bank will watch closely as it determines how much more tightening is required this cycle.
Table 1 - Canada — National Balance Sheet Accounts
(percent)
| 23Q1 | 22Q4 | 22Q3 | 22Q2 | ||
|---|---|---|---|---|---|
| Credit Market Debt to Disp. Income | (s.a.) | 184.5 | 181.7 | 184.7 | 183.1 |
| (n.s.a) | 180.5 | 181.0 | 183.3 | 182.8 | |
| Net Worth to Disposable Income | (n.s.a) | 1001.6 | 971.9 | 981.5 | 1013.3 |
| Debt to Total Assets | (n.s.a) | 15.4 | 15.9 | 15.9 | 15.4 |
| Homeowner Equity | (n.s.a) | 74.3 | 73.5 | 74.0 | 75.5 |
| Total Gross Government Debt to GDP | (n.s.a) | 124.9 | 125.9 | 127.0 | 130.0 |
| Total Net Government Debt to GDP | (n.s.a) | 25.3 | 26.0 | 26.4 | 28.4 |
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