Canada’s debt-to-income ratio largest in the G7 despite households being second wealthiest

Canada has the highest level of household debt to disposable income compared to other G7 countries, according to data released by Statistics Canada on Wednesday.

Data from 2021 shows that Canadians had nearly twice as high of a debt-to-income ratio when compared to the US and Germany. For every dollar a Canadian household spent, they owed about $1.85. In comparison, the average German and American owed one dollar for every dollar spent.

The lowest debt-to-income ratio in the G7 was Italy at approximately 90%, owing less than they spent.

This high level of debt comes despite Canada having the second-highest total household wealth as a percentage of net disposable income, only behind the United States.

Canada’s household debt has been rising for a while. Two years after the 2008 recession, household debt rose by 15% reaching 95% of household debt as the share of the GDP, and by 2021, debt exceeded the share of GDP, said the Canada Mortgage and Housing Corporation.

Comparatively, the debt-to-income ratio was just 66% in 1980.

Canada’s reliance on consumer spending as a key source of economic growth has contributed to greater debt burdens, said Statistics Canada.

“Likewise, housing has been a double-edged sword—critical for wealth creation for middle-class households, but also leading to imbalances between assets and debt,” said the agency.

Net savings have decreased since the pandemic, and renters and lower-income families are spending more than they make. 

Only residents in the fourth and fifth income quintiles are saving more than they spend, with everyone else spending more than they make. 

Statistics Canada added that the prevailing high-interest rates significantly affect younger families with substantial mortgage debts, highlighting the growing barriers to homeownership and their potential to hinder socioeconomic progress.

The data also showed that younger households may turn away from the housing market, leading to less mortgage debt overall.

While Canadian households have been reducing their borrowing due to higher interest rates, this cautious approach has a downside. Mortgage interest payments rose by 4% in the third quarter of 2023, indicating that despite borrowing less, families are facing higher costs.

This increase was coupled with the household debt service ratio climbing above 15% in the same period, with a shift towards paying interest instead of principal, further straining household finances.

The move by many to extend mortgage terms past 30 years, a trend that intensified after 2021, highlights the growing pressures on homeowners. Furthermore, 30% of total outstanding mortgage debt is tied up in variable-rate mortgages puts families in a precarious position, at the mercy of changing interest rates.

The challenging situation is expected to intensify in 2024 and 2024, when Statistics Canada predicts about 2.2 million households will encounter an “interest rate shock,” impacting nearly 45% of all outstanding mortgages.The renewal of mortgages is expected to be worth $675 billion.

Canadians anxiously await the Bank of Canada’s next interest rate announcement expected on March 6. The bank previously held the key interest rate at 5% in its last update in January, following three consecutive rate holds in 2023. 

The nation’s reliance on consumer spending and real estate investments has skewed the financial landscape for numerous Canadian families, with post-pandemic increases in savings and net worth largely benefitting the wealthiest and property owners, said Statistics Canada. 

Moreover, with nearly 50% of mortgages up for renewal in the next two years, there’s a looming cloud of financial instability for families already tightening their belts, which could further dampen consumer expenditure and, consequently, the broader economic vitality.

For average householders, real estate represents about 55% of their wealth, and mortgages represent most of their debt, even more pronounced among middle-class or working-age families.

Those 55 and older possess 61% of the total wealth in Canada, suggesting major risks for intergenerational mobility in the coming decades.

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