The proportion of disposable income Canadians are putting towards debt will likely set records in the months ahead as mortgage renewals bite and wage growth flattens, economists at several banks say.
A Statistics Canada report on national financial flows for the second quarter of 2024 released last Thursday shows the debt service ratio (DSR), a measure of the percentage of a household’s disposable income put towards debt payments, hit 14.97 per cent — slightly off the 15.03 per cent record set in Q1 2019.
The data also feature some positive details, with savings rates also increasing and household net worth hitting record highs.
The DSR has been flirting with the 15 per cent boundary since Q1 2023 without crossing it, but BMO economist Shelly Kaushik wrote in a note on Friday that “we wouldn’t be surprised” to see it “hit fresh record highs.”
“The ratio is expected to face further upward pressure as mortgages continue to renew at higher rates, and as a loosened labour market dampens income growth,” Kaushik said.
RBC economist Carrie Freestone wrote that the Bank of Canada’s expected ongoing interest rate easing cycle “will help to cap” the DSR “in the year ahead” but noted that interest rates remain high “and debt payments will continue to rise, on average, in the near term as additional waves of mortgage renewals (with significantly higher corresponding payments) are expected into 2025.”
The household savings rate grew to 7.2 per cent on a seasonally adjusted basis, Statistics Canada reported. Randall Bartlett, Desjardins’ senior director of Canadian economics, argued this was a sign of financial prudence as many anticipate higher mortgage payments.
“We think that Canadians are well aware of this looming drag on their household finances,” Bartlett wrote. “This helps explain the elevated savings rate in Canada, particularly when compared to the U.S. Nonetheless, non-mortgage holding Canadians are facing heightened financial stress, with a growing reliance on credit card debt to fuel their purchases.”
Statistics Canada’s Q2 data show Canadians’ household net worth reached a new record at $17.01 trillion, with assets crossing $20 trillion for the first time. Average net worth “remained steady at just over $1 million,” the agency says. It notes that the uneven distribution of wealth in Canada means that the average figure does not accurately define the wealth of many Canadians.
“In the first quarter of 2024,” the report says, “the wealthiest (top 20 per cent of the wealth distribution) households accounted for more than two-thirds (67.6 per cent) of household wealth, averaging $3.4 million per household, while the least wealthy (bottom 40 per cent of the wealth distribution) accounted for 2.8 per cent, averaging $70,356.”
John MacFarlane is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jmacf.
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