Canada's household debt-to-income ratio increases, posing challenges for economic growth
Rising levels of household debt are expected to prove a significant challenge for the national economy in the months ahead, according to a new analysis by BMO Economics.
Economist Shelly Kaushik pointed to a deterioration in household debt ratios in the first quarter of the year and noted that rising interest rates are pushing debt service costs higher in the wake of the Bank of Canada’s series of rate increases.
“That will likely act as a notable headwind on consumption and broader economic growth through the rest of this year and into 2024,” Kaushik said. “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.”
The household debt-to-income ratio in Canada increased by 2.8 percentage points to 184.5% in Q1, compared to the previous quarter's upwardly revised 181.7%. The unadjusted ratio experienced a slight dip of 0.55 percentage points to 180.5%.
Disposable incomes were negatively affected as government transfers decreased and interest costs rose, offsetting any compensation gains.
Borrowing also rose at the slowest pace since 2003, excluding the pandemic period.
Growth in mortgage loans hit a 20-year low, primarily due to the Bank of Canada's rate hike in the quarter.
Despite a potential rebound in mortgage demand in Q2, the tightening measures implemented may continue to weigh on the housing market 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," said Kaushik, highlighting the impact of rising debt payments.
On a positive note, household net worth experienced an improvement, reaching 1001.6% of disposable income and ending a streak of three-quarters of decline. This increase was attributed to the rise in equities and the recovery of the housing market.
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