Global Courant
OTTAWA –
Canadians have less money to spend even as they take on more debt, Statistics Canada reported Wednesday, at a time when interest rates are at their highest in decades.
On a seasonally adjusted basis, household credit market debt as a percentage of household disposable income rose to 184.5 percent in the first quarter, compared to 181.7 percent in the fourth quarter of 2022, the agency said Wednesday.
The figure translates to $1.85 in credit market debt for every dollar of disposable household income.
“Looking ahead, the cost of servicing debt is expected to continue to rise rapidly over the course of this year and peak in the second half of 2024 as interest rates are now expected to rise and remain high for longer,” said TD- economist Maria Solovieva in a note.
“This will create additional headwinds for households with high sensitivity to interest rates (such as floating rate mortgage holders) and could result in higher default rates going forward,” she said.
The household debt service ratio, measured as total debt repayments and interest on credit market debt as a percentage of households’ disposable income, stood at 14.9 percent in the first quarter of 2023, up from 14.4 percent in the fourth quarter of 2022.
That ratio is expected to hit record levels, possibly in the second quarter, as the lagging impact of higher interest rates continues to trickle down into household borrowing costs, Royal Bank of Canada assistant chief economist Nathan Janzen said in a note.
“The combination of higher inflation and debt payments already consumed growth in after-tax household income last year, and it looks set to do so again in 2023,” Janzen said.
The increase came as households borrowed $16.5 billion on a seasonally adjusted basis in the first quarter, including $11.2 billion in mortgage debt.
Canadians’ combined outstanding debt hit a new all-time high in the first quarter of the year, reaching $2.32 trillion, TransUnion reported two weeks ago. The average balance on most consumer credit products increased by 11.4 percent, while the average mortgage balance increased by 7.1 percent.
Total seasonally adjusted household credit market debt, which includes consumer credit and both mortgage and non-mortgage loans, rose 0.6 percent from the fourth quarter of 2022 to $2.84 trillion in the first quarter of 2023, including $2.11 trillion in mortgage debt, according to Statistics Canada.
“The Bank of Canada will need to keep a close eye on household credit performance as higher interest rates continue to weigh on Canadian households this year,” Solovieva said.
The Bank of Canada paused monetary tightening following the rate hike in January, but raised rates again last week, citing the threat of entrenched inflation. The overnight interest rate is now 4.75 percent, a far cry from the 0.25 percent in January last year.
Janzen said the bank still expects a weaker labor market and GDP data in the second half of 2023.
This report from The Canadian Press was first published on June 14, 2023.
