StatCan: Canadian household debt-to-income ratio surpasses levels seen across other G7 countries

03/06/2024 / By Laura Harris

Recently released data from Statistics Canada (StatCan) reveals that Canada has clinched the dubious title of having the highest household debt to disposable income level among G7 countries due to the country’s ongoing housing crisis.

Real estate constitutes a substantial portion of the average household’s wealth, accounting for approximately 55 percent, while mortgages represent the bulk of their debt. So, StatCan described housing as a “double-edged sword,” crucial for wealth creation in middle-class households, but also leading to imbalances between assets and debt.

According to the report released on February 28, Canadian households’ debt-to-income ratio has surged to 185 percent, a staggering 35 percent above the United Kingdom and nearly 85 percent higher than the United States. This translates to Canadians owing $1.85 for every dollar earned after taxes. The report highlights a significant increase from the 2018 ratio of 168 percent and an astonishing 119-point leap from the 1980 rate of 66 percent. (Related: American household debt reaches record high of $15 trillion.)

Residential mortgages, which last for over 30 years, have seen a sharp increase since the end of 2021, with borrowers facing renewal pressure and resetting their original amortization schedules. In fact, mortgage holders’ available cash flow is increasingly directed towards paying interest rather than chipping away at the principal amount.

In 2023, the Federal Reserve Bank of New York added an extra $121 billion to mortgage debt in the U.S., making the total mortgage debt $12.04 trillion by the end of March of that same year.

Even though fewer new mortgages were taken out – the process called mortgage originations – dropping to the lowest level since mid-2014 at $324 billion, the total mortgage debt still shot up. It’s 35 percent less than in late 2022 and 62 percent less than the same time last year.

This suggests that existing mortgages are getting more expensive because of higher interest rates. The New York Federal Reserve mentioned that the trend of people refinancing their mortgages, which surged during the pandemic, might be over.

During the refinancing boom, around $430 billion in home equity was taken out through cash-out refinances. About 64 percent of these mortgages were “rate finances,” leading to an average monthly payment reduction of $220 for those borrowers.

“The mortgage refinancing boom is over, but its impact will be seen for decades to come,” said Andrew Haughwout, director of household and public policy research for the New York Fed. “As a result of significant equity drawdowns, mortgage borrowers reduced their annual payments by tens of billions of dollars, providing additional funding for spending or paydowns in other debt categories.”

Debt-to-income ratios surge across all age groups

StatCan data also shows that debt ratios due to the burden of larger mortgages have surged across all age groups, headed by those under the age of 45.

Additionally, people under the age of 35 are more likely to “turn away from the housing market” due to rising interest rates and mortgage payments, given that more Americans are now living paycheck-to-paycheck.

“Dissaving for owners without a mortgage likely reflects age dynamics, as older Canadians are more likely to have paid off their home and are drawing from accumulated pension assets to support themselves during retirement – part of the life cycle of wealth and debt,” the authors added.

Meanwhile, Canadians older than 55 held 65 percent of the country’s total wealth in 2023, which could lead to “major risks for intergenerational mobility” in the coming decades.

During the peak of the pandemic, Canadians focused on saving due to COVID-19 emergency support programs offsetting income losses. However, in 2023, the pace of savings has intensified primarily among wealthy households. In contrast, middle- and lower-income households are spending more than they earn to cope with rising housing and food costs.

Looking ahead, the report predicts a looming crisis as nearly half of mortgages are set for renewal in 2024 and 2025. The uncertainty surrounding household finances, coupled with the potential impact on consumer spending, could spell trouble for the broader economy.

Learn more about the collapse of the American economy and household finances at DebtCollapse.com.

Watch this video detailing how household debt in the United States reached an all-time high at the end of the first quarter of 2023.

This video is from the channel Money Talk$ on Brighteon.com.