Shoppers navigate Yorkdale Mall in Toronto on Nov. 26, 2021.Tijana Martin/The Canadian Press
Canadians saw their wealth tumble and their debt obligations rise substantially during the summer, as the Bank of Canada rapidly hiked interest rates in an attempt to bring inflation under control.
Households made about $57.4-billion in debt payments during the third quarter, a record quarterly increase of 6.1 per cent, Statistics Canada said in a report on Monday. The interest portion of debt payments jumped by 17.8 per cent, also a record.
Meanwhile, Canada’s household net worth – the value of all assets minus liabilities – fell by around $330-billion during the third quarter, following a record quarterly decline of more than $930-billion between April and June. Despite the swoon, the country’s current household wealth, at $15.1-trillion, remains about $2.7-trillion higher than it was at the end of 2019.
The Bank of Canada and other central banks have been quickly raising interest rates as they work to tame consumer price increases by cooling the economy with higher borrowing costs, a shift that has reverberated in housing and financial markets. At the end of the third quarter in September, the Bank of Canada’s key lending rate was 3.25 per cent, up from a low of 0.25 per cent in March.
The bank has continued raising interest rates in the current quarter. Earlier this month, after it raised its policy rate by half a percentage point to 4.25 per cent, it suggested its hiking cycle is nearing an end.
The turn in monetary policy has shaken up personal finances.
Canada’s household debt burden – the ratio of credit market debt to disposable income – rose to 183.3 per cent in the third quarter, from 182.6 per cent in the second quarter, in seasonally adjusted terms. The ratio is nearing the record high set in 2018: 185 per cent.
Put another way, Canadian households owe $1.83 for every dollar of after-tax income.
“Mounting debt service costs, as well as lower household wealth, further weakened households’ financial position,” Shelly Kaushik, a Bank of Montreal economist, said in a note to clients. “High household indebtedness remains a key vulnerability for the Canadian economy, and one that the [Bank of Canada] will monitor closely as it evaluates the impact of its aggressive rate hikes.”
Higher borrowing costs are having a tangible impact on real estate, leading to fewer home sales and generally lower prices. The value of residential real estate owned by households fell by 3.4 per cent (about $270-billion) in the third quarter, Statscan said.
Even so, the decrease has erased just a portion of the scorching rally that took place when interest rates were low. The total value of residential real estate is 35 per cent higher than it was at the end of 2019.
The value of household financial assets fell 0.4 per cent. Canadians have been investing more in fixed-term deposits, such as guaranteed investment certificates, as stocks have languished.
“Higher returns combined with the relative security of fixed-term deposits is likely increasing their attractiveness to household depositors, compared with other types of investments that are currently subject to more uncertainty,” Statscan said.
As interest rates rise, Canadians are taking on debt at a slower pace. Households added $33-billion of debt in the third quarter, down from about $57-billion in the second quarter. When interest rates were at rock-bottom levels in 2020 and 2021, Canadians were borrowing heavily, particularly to buy homes in a frenzied market.
All told, consumers have about $2.8-trillion in debt, of which $2.1-trillion is mortgages.
The household debt-service ratio – total obligated payments of principal and interest on debt, as a proportion of disposable income – rose to 14 per cent in the third quarter, from 13.5 per cent in the second quarter, adjusted for seasonality. The record high, set in 2007, is 15 per cent.
Many households have avoided the impacts of higher interest rates, at least so far. Some have fixed-rate mortgages, while others have variable-rate mortgages with fixed payments. For the latter, mortgage payments remain the same even as interest rates rise – although increasing portions of those payments are directed to interest, rather than principal.
A growing number of those variable-rate borrowers are hitting their trigger rates – the points at which their monthly payments no longer cover the interest owed, resulting in higher payments. A recent Bank of Canada report estimated that about half of variable-rate mortgages with fixed payments had already hit their trigger rates by the end of October.
“Interest rates are expected to remain elevated throughout next year, meaning that the debt service ratio will continue to rise, likely exceeding its pre-pandemic peak by the second half of next year,” Toronto-Dominion Bank economist Ksenia Bushmeneva told investors in a note.
“As Canadians dedicate more of their income to debt servicing, hard choices will be made with respect to discretionary spending, which we expect to be very modest” in 2023, she added.
Despite various financial challenges, Canadians managed to save more. The household savings rate grew to 5.7 per cent in the third quarter, from 5.1 per cent in the second quarter. Between 2010 and 2019, the average was 3.4 per cent. The savings rate increased because household disposable income rose at a faster pace (0.8 per cent) than consumption (0.5 per cent).
“There’s little surprise that consumers had to tighten their purse strings and reduced consumption” in the third quarter, Ms. Bushmeneva said.