Where Canada’s world-leading household debt is hurting the most

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It’s no secret that Canada has one of the highest household debt levels in the world. According to Bank for International Settlements data, only Switzerland and Australia are higher among advanced economies.

But the burden of this debt hits some harder than others.

A new study by Fédération des caisses Desjardins du Québec looks at the uneven effect higher interest rates are having on Canadians and what this means for the nation’s financial stability.

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The group that is being hit the hardest is not inconsequential.

The three lower-income groups in Canada make up 60 per cent of the population and hold 45 per cent of the household debt.

The debt-to-disposable-income ratio is a lot higher for these households and it’s rising, but that’s not the most important indicator for determining financial vulnerability, said the economists.

“What matters is that households have enough money to cover the costs of servicing their debts,” they said.

While the percentage of income going to interest payments has increased for everyone, the ratio has increased sharply for households in the lowest income group, reaching 18 per cent of income in 2023, said the study.

Spending more to service their debt and to keep up with the cost of living has left these households with little to no room to save.

While households in the top 40 per cent of income have been able to save more each year, net dissaving — or spending more than you earn  — has increased for the remaining 60 per cent of Canadians.

“This may be worrisome, considering that between 2019 and 2023, households in the three lower-income quintiles increased their share of mortgage debt and that rising interest rates have made it substantially more expensive to service this debt,” said Desjardins economists Maude Drapeau and Lorenzo Tessier-Moreau.

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Data show that households are already having to make tough choices.

Real consumer spending per person fell in 2023 and by March 2024 credit market debt had grown for the fifth month in a row, said the study. The 60-plus delinquency rate for non-mortgage loans is now back to 2019 levels.

The household insolvency rate is still holding up, but the “situation remains fragile” as many Canadians have yet to experience the full impact of higher interest rates. The financial strain will only increase over the next 18 months as more renew their mortgages at higher rates, said the economists.

Bank of Canada interest rate cuts to come will offer some relief, but only a rise in income will help absorb the shock, said the report.

Meanwhile, the gap between the richest and poorest continues to widen. The 60 per cent of Canadians in the three lower-income groups have just 35 per cent of the income and assets.

“This population is therefore more vulnerable to various economic or financial shocks, a situation that threatens broader financial stability,” said Drapeau and Tessier-Moreau.

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“That’s why this issue must be addressed, ideally by improving income for the demographic groups in question.”

The report offers a number of suggestions for the government such as investing in job training, bolstering productivity and encouraging entrepreneurship.

And then there’s housing — one of the biggest expenses households face in this country. Rented housing inflation hit 8.6 per cent in May, the highest since 1983.

“Limiting the rise in these costs could help bolster real income for households for whom housing is the main expense,” said the economists.

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Could the Canadian dollar be coming up in the world?

Recent data from the International Monetary Fund suggest that the country may be gaining favour with foreign investors, say National Bank economists.

Once a quarter, the IMF releases its Currency Composition of Official Foreign Exchange Reserves, known as COFER, which gives a look at where countries’ reserves are allocated.

The IMF’s latest data shows that the allocation of the Canadian dollar has increased and now ranks fifth in the IMF’s basket of eight currencies.

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The United States leads, of course, followed by the euro, Japanese yen and pound sterling.

Canada’s allocation of 2.57 per cent puts it ahead of Chinese renminbi, Australian dollar and Swiss franc.

That allocation adds up to a lot of Canadian dollars — $400 billion, which is  fourfold the reserve interest since the end of 2012, said National Bank economist Warren Lovely.

“Given the relative size of the Canadian economy, the country’s available financial assets and outstanding debt securities, the still-growing pool of FX reserves allocated to CAD can only be labeled ‘material’.”

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