Current trends are likely to further eat into consumer purchasing power, market observers say
Canada’s unsustainable household debt load is likely to further constrain economic growth and inflict more serious dents on consumer purchasing power, according to economists David Rosenberg and Julia Wendling.
“This will be at a time when the housing sector, which had been boosted by investor speculation throughout the COVID-19 pandemic, is set to crumble,” Rosenberg and Wendling wrote in a recent analysis for The Globe and Mail.
“Consumers will be further sent into a state of distress … [and] these developments will likely ensure a premature end to the central bank’s tightening phase as the realization that recession is imminent sets in.”
Latest data from the Canada Mortgage and Housing Corporation showed that the nation’s residential mortgage debt grew by 9% annually in 2021, with outstanding mortgages reaching $1.77 trillion in the third quarter.
These loads were built on some of the highest pre-pandemic levels of household debt globally, with the Canadian household debt-to-GDP ratio clocking in at 102% in Q4 2019 (versus 74% in the United States).
“In large part, the runup in Canadian debt levels can be traced to the near-vertical uptick in home prices, which in turn fuelled demand for riskier and riskier mortgages as this speculative frenzy encouraged households to load up on leverage in order to participate in the bubbly real estate market,” the duo said.
Read more: Canada tightens rules on riskiest mortgages
In the years since, these trends compelled consumers to allocate a greater portion of their budgets to service debt, at the expense of other kinds of spending – leading to another monkey wrench in the engines of GDP growth.
“Debt levels and economic growth prospects have a negative relationship,” Rosenberg and Wendling said. “Based on just the lofty levels of household debt alone, one can reasonably argue that the Canadian economy is in a fragile state. But throw in the fact that the beloved real estate market is vulnerable to a collapse at any moment and the problem becomes even more acute.”
The current deceleration, and the increasing likelihood of an all-out collapse, should therefore come as no surprise.
“The key takeaway is that the Canadian economy is in a much more fragile state than the central bank realizes. The unsustainable levels of household debt will not only hinder future economic growth but will also ensure that the upcoming recession will be far more disastrous than many believe – especially since the speculative housing market looks set for a monstrous fall-off,” Rosenberg and Wendling cautioned.
