Canada Housing Market

Interest Payments Now Consume Nearly 20% of Income for Some Canadians

Canada ranks third globally for household debt among advanced economies, trailing only Switzerland and Australia. This high debt burden impacts Canadians unevenly, with lower-income households bearing the brunt.

Impact of Rising Interest Rates

A recent study by Fédération des caisses Desjardins du Québec reveals the uneven effects of rising interest rates on Canadians, highlighting significant implications for the nation’s financial stability.

Key Findings:

Debt Distribution: Lower-income groups, which make up 60% of Canada’s population, hold 45% of household debt. This demographic is increasingly vulnerable as debt servicing costs rise.

Interest Payments: Households in the lowest income bracket are now spending over 18% of their income on interest payments alone, leaving little room for savings or other expenses.

Savings and Spending: While the top 40% of income earners have managed to save more each year, the remaining 60% are experiencing net dissaving, spending more than they earn.

Economic Vulnerability:

Financial Strain: Real consumer spending per person declined in 2023, and credit market debt has been rising for five consecutive months. Non-mortgage loan delinquencies are now at 2019 levels, indicating increasing financial distress.

Future Concerns: Although the household insolvency rate remains stable, the situation is precarious. Many Canadians have not yet faced the full impact of higher interest rates. Financial strain is expected to intensify over the next 18 months as more mortgages are renewed at higher rates.

Income Disparity: The gap between the richest and poorest Canadians is widening. The lower-income 60% hold just 35% of the nation’s income and assets, making them more susceptible to economic shocks and threatening broader financial stability.

Recommendations:

The report recommends targeted investments in job training, productivity enhancement, and entrepreneurship to improve incomes for vulnerable groups.

With rented housing inflation reaching 8.6% in May—the highest since 1983—controlling these costs could significantly boost real incomes for many households.

Conclusion:

Addressing Canada’s household debt crisis requires a multifaceted approach. Improving income for lower-income groups and managing rising housing costs are critical steps to ensure financial stability. As the financial landscape evolves, these measures will help safeguard the economic well-being of millions of Canadians.

Source: canada-interest-rates-28-june-2024.pdf (desjardins.com)