Household debt level rises as interest rates bite into cash flow
OTTAWA –
Canadians have much less money to spend at the same time as they’re taking up extra debt, Statistics Canada reported Wednesday, at a time when rates of interest are the very best they have been in many years.
On a seasonally adjusted foundation, family credit score market debt as a proportion of family disposable earnings rose to 184.5 per cent within the first quarter, up from 181.7 per cent within the fourth quarter of 2022, the company mentioned Wednesday.
The determine interprets to $1.85 in credit score market debt for each greenback of family disposable earnings.
“Looking ahead, debt servicing costs are expected to continue to rise rapidly over the course of this year and peak in the second half of 2024, as interest rates are now expected to rise and remain elevated for longer,” mentioned TD economist Maria Solovieva in a observe.
“This will create additional headwinds for households with a high sensitivity to interest rates (such as variable rate mortgage holders) and could result in higher delinquency rates in the future,” she mentioned.
The family debt service ratio, measured as whole obligated funds of principal and curiosity on credit score market debt as a proportion of family disposable earnings, was 14.9 per cent within the first quarter of 2023, up from 14.4 per cent within the fourth quarter of 2022.
That ratio is about to hit document ranges, doubtlessly within the second quarter, because the lagging impression of upper rates of interest continues to filter by way of to family borrowing prices, mentioned Royal Bank of Canada assistant chief economist Nathan Janzen in a observe.
“The combination of higher inflation and debt payments already soaked up all of the growth in household after-tax incomes last year, and looks likely to do so again in 2023,” Janzen mentioned.
The improve got here as households borrowed $16.5 billion on a seasonally adjusted foundation within the first quarter together with $11.2 billion in mortgage debt.
Canadians’ mixed excellent debt hit a brand new document within the first quarter of the 12 months, reaching $2.32 trillion, TransUnion reported two weeks in the past. Average balances on most client credit score merchandise rose by 11.4 per cent, whereas common mortgage balances have been up 7.1 per cent.
The whole seasonally adjusted inventory of family credit score market debt, which incorporates client credit score and each mortgage and non-mortgage loans, rose 0.6 per cent from the fourth quarter of 2022 to $2.84 trillion within the first quarter of 2023, together with $2.11 trillion in mortgage debt, Statistics Canada mentioned.
“The Bank of Canada will need to maintain a close watch on household credit performance as higher interest rates continue to weigh on Canadian households this year,” mentioned Solovieva.
The Bank of Canada had hit pause on its financial tightening after its January hike however raised charges once more final week, citing the specter of entrenched inflation. Its in a single day price is now 4.75 per cent, a far cry from 0.25 per cent in January of final 12 months.
Janzen mentioned the financial institution continues to count on a softer labour market and weaker GDP knowledge over the second half of 2023.
This report by The Canadian Press was first printed June 14, 2023.
