As the Canadian economy navigates a challenging landscape, households across the country are facing a significant headwind in the form of high levels of indebtedness.
Jessica Hinds, director of the Sovereign Group (Economics) at Fitch Ratings, dove into the financial vulnerabilities of Canadian consumers, highlighting the mounting debt burden and the impact of rising interest rates during the fall’s Talk Auto conference.
She noted that although the household debt burden has fallen to 177 per cent of income, it is still “very, very high, both historically and internationally.” She pointed out that prior to the global financial crisis, the debt levels of American and Canadian households were broadly similar, but have since “diverged massively.”
The cost of servicing this debt has reached historically high levels, with interest payments alone accounting for 9.3 per cent of disposable income.
“It has never really been higher,” Hinds said as she showed a chart dating back to 1990.
The situation is further exacerbated by the prevalence of fixed-rate mortgages in Canada. Hinds explained that “half of all outstanding mortgages are held by borrowers who have yet to face higher rates, according to the Bank of Canada.”
However, she warned that “by the end of 2025, the share of households still not having been subject to a payment increase will have fallen to just 15 per cent.”
This impending “wall of renewals” in the mortgage market is just one aspect of the financial vulnerability facing Canadian households, and it is expected to have a significant impact on their ability to afford additional spending.
Hinds emphasized that the high level of household debt is a “significant headwind to both the outlook for consumer spending and for the overall economy.”
She noted that the long-term trend of proposals taking the majority share of insolvencies relative to bankruptcies continues, “partly due to the improved affordability of proposals” and “their less severe impact on borrowers’ assets.”
Despite the challenges, Hinds sees some glimmers of optimism. She pointed out that the Bank of Canada is now firmly in rate-cutting mode, with the policy rate projected to fall to 3 per cent by the end of this year and 2.5 per cent by the end of 2026.
“The impact of policy loosening is also starting to be seen in banks adjusting their credit standards. A majority of Canadian banks in the second quarter ease their credit standards or mortgage loans, though non-mortgage loan standards still continue to be tightened,” Hinds said.
However, she emphasized that “interest rates are not set to be heading back to anywhere near where they were in the long decade following the global financial crisis.”
Canadian consumers, with all the debt they have accumulated, will need to adapt to a “structurally higher rate environment,” which will be a significant challenge for both household spending and the overall economic outlook.
Image credit: Depositphotos.com
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