- Randall Bartlett
Senior Director of Canadian Economics
Economic News
Canada: Households Were Wealthier but More Stretched in 2023
March 13, 2024
Highlights
- Canadian households were wealthier in Q4 2023 as net wealth increased by 1.8% ($300B) in the quarter, largely reversing the prior quarter’s decline. This advance can be chalked up to a rebound in financial market returns as both equities and bonds rallied, more than offsetting a modest retreat in the value of residential real estate. For 2023 as a whole, Canadians were about $712.7B richer than in 2022, albeit concentrated in relatively few households.
- At the same time, the pace of borrowing rose for the second consecutive quarter in Q4, with households demanding $29.5B in funds. While the vast majority of this was for mortgage loans ($21.3B), the $8.2B jump in consumer credit was the second largest quarter of net origination since 2009. This is concerning, as it suggests many Canadian households may be increasingly stretched.
- Household credit market debt now tallies over $2.9T, nearly three quarters of which is mortgage loans. But to put that in context, household debt was 178.7% of the disposable income of Canadians in Q4—down slightly from Q3 and the lowest level outside of the pandemic since the end of 2015 (graph 1). That said, Canadian households were the most indebted in the G7 by a wide margin in 2022, and the 2023 data suggest this likely hasn’t changed.
- Meanwhile, the household debt service ratio—the share of disposable income directed toward debt payments—held steady at around 15.0% in the fourth quarter. That remains near the highest level since data began being collected in 1990 (although it should be noted the Q3 was revised meaningfully lower from 15.2% to 15.0%). This is largely the result of the cost of servicing mortgage debt, which started hitting record highs as soon as the Bank of Canada (BoC) began hiking interest rates in 2022 (graph 2). Indeed, the interest-only portion of the mortgage debt service ratio is the highest it’s been since 1996. But on the bright side, these relative measures of mortgage debt service cost broadly stabilized in Q4 for the first time since the Bank kicked off the current rate hiking cycle.
- The stabilization of the debt service ratio in Q4 reflected increases in both debt payments and disposable income of about 1.3% in the quarter. While higher compensation of employees helped, the gains were concentrated in household rental, property and other income again last quarter. However, this good news was tempered somewhat by an increase in net transfers paid by households to governments and other institutions.
Implications
Canadians are clearly feeling the squeeze of higher interest rates, as they dedicate a greater share of their income to servicing mortgage debt than ever before. But keep in mind that a large share of borrowers have yet to feel the full impact of higher interest rates as they haven’t renewed their mortgages. As they do, they too will come up against higher monthly payments. We think Canadians are well aware of this looming drag on their household finances. This helps to explain the still elevated savings rate in Canada, particularly when compared to the US. Household consumption has also been broadly flat over the past few quarters despite surging population growth—a trend we expect to continue on the back of ongoing mortgage renewals.
Slowing household consumption as a result of higher interest payments is exactly the intent of the Bank of Canada’s restrictive monetary policy. And with inflation slowing External link., the BoC has begun to soften its tone External link., if only marginally. We believe inflation will continue to trend toward the Bank’s 2% target over the course of the year, notably kept aloft by high mortgage interest cost resulting from elevated borrowing costs. Given the role of monetary policy in keeping inflation higher than it would otherwise be, we think there is scope for the Bank to begin taking its foot off the brake before inflation reaches 2%. As such, we are of the view that the Bank of Canada will begin cutting interest rates in June.