- Randall Bartlett, Senior Director of Canadian Economics • LJ Valencia, Economic Analyst
Economic News
Canada: Households Continued to be Stretched in Q2 2024
September 12, 2024
Highlights
- Canadian households were marginally wealthier in Q2 2024 as net wealth increased by 0.2% q/q ($42B) in the quarter. This slow advance follows gains in household equities and a modest retreat in the value of housing.
- At the same time, the pace of household borrowing eased for the second consecutive quarter, with households demanding $25.1B in funds. This was the most measured advance in household borrowing since Q2 2023. Under the hood, this more modest gain was driven by a significant slowdown in consumer credit lending which fell to $4.0B in the second quarter. Still, the vast majority of household borrowing was for mortgage loans ($18B).
- While household credit market debt tallied $3.0T in Q2, household credit market debt as a proportion of household disposable income fell for the fifth consecutive quarter to 175.5% in the second quarter. However, this is still not far from the historic high reached at Q1 2023 (graph 1). Regardless, Canadian households were the most indebted in the G7 by a wide margin in 2023, and the 2024 data suggest this likely hasn’t changed.
- Meanwhile, the household debt service ratio—the share of disposable income directed toward debt payments—rose ever so slightly to 15% in the second quarter, not far from the unprecedented peak reached in Q2 2023. This near-record high indicates ongoing stress for households, especially as the mortgage-only debt service ratio stood at a record high of 8.2% in the second quarter (graph 2).
- The current trend of the debt service ratio in Q2 shows debt payment growth outpacing gains in disposable income by about 0.5% q/q.
Implications
Today’s household balance sheet data continue to show mixed signals. Still-high interest rates are putting greater stress on Canadians, especially as more households grapple with costly mortgage payments. According to the Bank of Canada’s latest Financial Stability Report, roughly half of mortgage holders had yet to feel the full impact of high interest rates at that time. Once these households experience a mortgage renewal, they will face significantly greater financial strain because of higher monthly payments.
However, Canadians are demonstrating a degree of resilience. Income growth and reduced discretionary spending have contributed to a relatively stable household consumption. Moreover, we think that Canadians are well aware of this looming drag on their household finances. This helps explain the elevated savings rate in Canada, particularly when compared to the US. Nonetheless, non-mortgage holding Canadians are facing heightened financial stress, with a growing reliance on credit card debt to fuel their purchases.
High interest rates are working, as the advance in household consumption is slowing down, which is the intent of restrictive monetary policy. Inflation is heading towards the Bank’s 2% target and the economy is in excess supply. Recent job numbers External link. point to growing unemployment despite job gains. Still, the Bank faces an ambitious task of achieving a soft landing given present vulnerabilities and future headwinds. This has gradually increased the odds of the Bank cutting rates by 50 basis points in October, potentially providing even greater relief for Canadians.