Canadian households have more debt relative to their income than at the start of the year, according to Statistics Canada data released Monday.
According to the federal agency, household debt as a percentage of disposable income rose to 181.7% in the second quarter of this year, from 179.7% in the first quarter. This means that for every dollar of disposable income, the average household owes about $1.82 in debt.
The change signals an increase in debt levels similar to rates seen before the pandemic, said André Bolduc, a partner at BDO Canada and a licensed insolvency trustee. The increase is not unexpected given inflationary pressures and rising interest rates, he said, and those influences are likely to mean the ratio will continue to rise.
During the COVID-19 lockdowns, Canadians had more money because they had less money to spend their disposable income. Now that people are back to their normal spending habits, their debts are rising, as are interest rates and the cost of living, Bolduc said. At the same time, there has been little upward movement for wages.
“It costs people more to live, and for people in debt, it also costs them more to carry that debt,” Bolduc said.
On a seasonally adjusted basis, households added $56.3 billion in debt in the second quarter, including $48.7 billion in mortgages, according to Statistics Canada data.
The household debt service ratio was 13.63% in the second quarter compared to 13.34% in the first quarter.
David Macdonald, senior economist at the Canadian Center for Policy Alternatives, said while there is an increase in household debt service levels, the current rate is in line with what has been seen for some time.
The rate has been relatively stable since around 2016, Macdonald said, adding that it is expected to fluctuate to some degree.
Meanwhile, Canadians are facing a rapid reversal in interest rates “to rock bottom” because, in an attempt to calm inflation, the Bank of Canada has raised its key interest rates, Macdonald said. .
The impact of these rate hikes is now reflected in the debt and diminished borrowing power of Canadians seeking high-cost loans, such as new mortgages.
“What we see … is the policy objective of the Bank of Canada,” he said. Since people now feel poorer overall, they will spend less in the economy, Macdonald said.
Further increases in the debt-to-equity ratio over the next few quarters are likely since Statistics Canada data is an average and slightly lagging, Bolduc said. While the ratio is certainly not a surprise, Bolduc is concerned about the average Canadian’s debt load.
For people who are heavily in debt and making only minimum monthly payments, the cost of living and further expected interest rate hikes could push them over the edge, he said.
People renewing their mortgages will pay more given the rate changes, Bolduc said.
“When this happens, there’s less room left in the budget for living expenses, and we know people who struggle with this use credit to make ends meet,” he said. “At one point, people hit the wall.”
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