The increase arrived amid another jump in interest rates
Household credit market debt as a proportion of disposable income spiked from 181.7% in Q4 2022 to 184.5% in Q1 2023, according to Statistics Canada.
The gains accompanied the Bank of Canada’s rate hike campaign, which pushed the central bank’s policy rate to a multi-decade high of 5%.
On a seasonally adjusted basis, Canadian households borrowed an estimated $16.5 billion in Q1, with mortgage debt accounting for $11.2 billion. The household debt service ratio also went up from 14.4% to 14.9% during the first quarter, StatCan reported.
“Looking ahead, debt servicing costs are expected to continue to rise rapidly over the course of this year and peak in the second half of 2024, as interest rates are now expected to rise and remain elevated for longer,” TD economist Maria Solovieva said in a note, as reported by CTV News.
“This will create additional headwinds for households with a high sensitivity to interest rates (such as variable rate mortgage holders) and could result in higher delinquency rates in the future,” she added. “The Bank of Canada will need to maintain a close watch on household credit performance as higher interest rates continue to weigh on Canadian households this year.”
The potential of a #recession later this year, combined with the anticipated rise of the unemployment rate to 6.6% by early 2024, will likely drive more Canadians towards loan delinquency and insolvency, according to RBC Economics.https://t.co/PCQA53jPnC#mortgagenews
— Canadian Mortgage Professional Magazine (@CMPmagazine) May 4, 2023
Royal Bank of Canada assistant chief economist Nathan Janzen warned that the worst might be yet to come, as there will be some lag when it comes to the full impact of higher interest rates.
“The combination of higher inflation and debt payments already soaked up all of the growth in household after-tax incomes last year, and looks likely to do so again in 2023,” Janzen said.
