Canada’s household debt burden is edging lower, an indication that people are hesitant to take on loans at higher interest rates.
The ratio of household debt to disposable income fell to 175.5 per cent in the second quarter from 176.7 per cent in the first quarter, based on seasonally adjusted figures published Thursday by Statistics Canada. It marked the fifth consecutive quarterly decline.
Put another way, the average household owes around $1.76 for every dollar of disposable income. The ratio peaked at 185.4 per cent in the fourth quarter of 2021.
“Households remain under pressure from rising rates but have adjusted their behaviour, pushing debt ratios consistently lower,” Benjamin Reitzes, a Canadian rates and macro strategist at Bank of Montreal, said in a client note.
Canadians ramped up their borrowing over much of the past two decades, a period that coincided with rising home prices and generally low interest rates. This turned elevated household debt levels into a perennial concern for the Canadian economy.
Household finances have recently been tested by aggressive Bank of Canada rate hikes over 2022 and 2023 to tame inflation.
But thus far, the average household is seeing its disposable income grow at a faster rate than its debt load. Statscan noted that debt has grown 4.3 per cent since the first quarter of 2023, while disposable income has jumped 8.5 per cent.
Still, Canadians are facing relatively hefty payments on those loans. The household debt-service ratio (total obligated payments of principal and interest as a proportion of disposable income) rose to 14.97 per cent in the second quarter from 14.89 per cent in the first quarter in seasonally adjusted terms. The debt-service ratio is in line with previous peak levels.
Many borrowers are also facing mortgage renewals in 2025 and 2026 at higher interest rates, which could result in heftier monthly payments.
“With mortgage resets still coming and the labour market loosening, we wouldn’t be surprised if this [debt-service] ratio hits a record high in the coming quarters,” Mr. Reitzes said. “However, Bank of Canada rate cuts should provide some offset.”
The central bank has cut its benchmark interest rate at three consecutive meetings this year, taking it to 4.25 per cent from 5 per cent. The BoC is widely expected to deliver more cuts this year and in 2025.
Households saw their overall wealth grow 0.2 per cent in the second quarter to $17-trillion, with gains in financial assets offsetting a decline in the value of real estate assets.
The average net worth per household is roughly $1-million. However, Statscan noted that the wealthiest 20 per cent of households hold more than two-thirds of total wealth.