September 13, 2023 | 09:23
Canada’s household debt-to-income ratio fell 3.6 ppts to a seasonally adjusted 180.5% in Q2, from a revised 184.2% in the prior quarter. The unadjusted ratio edged down 0.15 ppt to 180.0%. On an adjusted basis, disposable incomes outpaced borrowing, as higher earnings drove the former. Meantime, demand for mortgage loans fell amid the Bank’s two rate hikes in June and July. Looking ahead, elevated interest rates should continue to weigh on mortgage demand in the coming quarters.
The household debt service ratio (interest and principal as a share of disposable income) fell from 14.9% to 14.8% as income growth outpaced debt service costs. However, we expect some retracement in the coming quarters as wage growth eases and interest payments, especially for mortgages, continue to mount.
Household net worth rose to 1003.4% of disposable income. The value of household assets improved thanks to gains in foreign equity markets as well as the recovery in domestic home prices. The latter pushed up the share of owners’ equity in real estate from 74.25% to 74.5% in Q2.
Meantime, government debt ratios were mixed amid an increase nominal activity but higher borrowing and interest costs. Gross general government debt (includes all levels of government) ticked up 0.2 ppt to 125.2% of GDP, its first increase since 2020. Net debt declined 0.9 ppts to 24.2% of GDP in Q2, in line with its pre-pandemic range.
Key Takeaway: A tight labour market powered a jump in household disposable incomes, which led to an improvement in household debt ratios in Q2. Looking ahead, however, a cooler job market will likely slow income growth in the coming quarters. And, high interest rates will keep service costs rising. Elevated household debt remains a notable headwind to consumer spending, especially as mortgages come to renewal, leading to an expected slowdown in broader economic activity through the rest of the year.