Rich getting richer: Canadian households' debt-to-disposable-income ratio now highest in G7
It is no secret that the household debt in Canada is the highest debt of all G7 countries, but new data from Statistics Canada shows that the situation is far more complicated than we might’ve pegged it to be.
Last year in May, Canada Mortgage and Housing Corporation (CMHC) reported that Canada’s household debt was the highest in the G7. CMHC Deputy Chief Economist Aled ab Iorwerth found that it had risen “inexorably” compared to other countries.
“At the time of the recession in 2008, it stood at about 80% of the size of the economy; in 2010, it rose to 95%, and by 2021, debt exceeded its size,” he said. Mortgages were one of the biggest culprits.
According to the Statistics Canada report released Wednesday, Canadian households are the second wealthiest in the G7, with the US snagging the top spot. However, the country’s reliance on consumer spending as a key source of economic growth has “contributed to greater debt burdens.”
Experts are calling housing a “double-edged sword” in the situation, adding that it is critical for wealth creation for middle-class households but has also been leading to debt-asset imbalances.
In short, the rich are getting richer while others spend more than they earn to withstand rising cost-of-living pressures.
The chart below is based on 2021 data — the same year that Canada’s Consumer Price Index (CPI) rose 3.4% on an annual average basis, the “fastest pace since 1991 (+5.6%),” per StatCan.
Statistics Canada
StatCan said that outside the pandemic, household spending has been the main contributor to economic growth since 2015, more recently supported by residential investment in 2021. Business investments pale in comparison in the last decade.
The country’s debt-to-disposable income ratio stands at a staggering 185.2%.
The country with the second highest percentage (150.6%) is the UK, which means for every £1 of disposable income, UK households owe £1.50.
Our closest counterpart, the US, is in a different position. Despite being the wealthiest G7 country, its debt-to-disposable income ratio is around 102%.
Statistics Canada
During the first couple of years of the pandemic, Canadian household savings were “equivalent to cumulative savings from 2010 to 2019.” This might have been due to shutdowns and fewer avenues to spend the disposable dollar.
“Canadians saved more at the height of the pandemic, as COVID-19 emergency supports offset income losses from public health shutdowns while shifting consumer behaviours also contributed to greater saving,” the report covering wealth and debt disparity reads.
“More recently, the pace of savings continued to accelerate, mainly for the richest households, while lower-income households are spending more than they earn to withstand current affordability pressures.”
Statistics Canada
Further data shows that the number of residential mortgages lasting more than 30 years has “grown substantially” since the end of 2021, while borrowers increasingly face the pressure to renew their mortgages and reset the original amortization schedule.
Statistics Canada predicts that in 2024 and 2025, an estimated 2.2 million Canadian households will be “facing an interest rate shock,” representing 45% of all outstanding mortgages. The total amount of mortgage loans to be renewed would be around $675 billion, per CMHC.
Many mortgage owners are watching the Bank of Canada’s (BoC) next overnight key interest rate announcement on March 6.
The central bank held the key interest rate at 5% in the last update in January. It came after three consecutive rate holds in 2023.
In a recent report, Oxford Economics researchers said they believe the 5% key rate will be held until the middle of 2024, when the BoC will trigger a cycle that lowers the rate.
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