EconoFACTS

September 12, 2024 | 09:30

Canadian National Balance Sheet Accounts (2024 Q2) — Under Pressure

Economist

Managing Director, Canadian Rates & Macro Strategist
Fixed Income Strategy

Benjamin has been with the Bank of Montreal nearly two decades. He is re-sponsible for the Canadian macro-econom... (Read more)

Benjamin Reitzes

Managing Director, Canadian Rates & Macro Strategist
Fixed Income Strategy

Benjamin has been with the Bank of Montreal nearly two decades. He is re-sponsible for the Canadian macro-econom... (Read more)

Canadian household debt ratios fell 1.2 ppts to 175.5% in Q2 (seasonally adjusted) continuing the downward trend over the past two years. Looking through the pandemic distortions, the debt ratio is at the lowest since late 2015. While interest rates are falling, they remain well above levels seen over most of the prior decade, which should incentivize Canadians to continue trimming their debt burdens. On an unadjusted basis, the debt-to-income ratio fell 0.6 ppt to 174.6%. Solid income growth (+7.6% annualized) was helpful, as liabilities rose 6.3% in the quarter, with consumer credit and mortgage growth perking up a bit.

The household debt service ratio (interest and principal as a share of disposable income) ticked higher to 14.97%, just shy of the record high 15.0% hit a year ago. As noted above, strong income growth is helping limit the ramp up this ratio. With mortgage resets still coming and the labour market loosening, we wouldn't be surprised if this ratio hits a record high in the coming quarters. However, Bank of Canada rate cuts should provide some offset.

Household asset ratios, always overshadowed by the debt headlines, rose in Q2. Household net worth slipped to 999.8% of disposable income, as lower home prices dampened the increase in net worth. Owners’ equity in real estate slipped four ticks to 75.4%, continuing the pullback from 2022's record high, but still about 3 ppts above 2015-2019 levels.

The debt-to-asset ratio rose modestly to 15.04%, but the broader downtrend remains intact. This implies that Canadian households have $6.65 of assets for every $1.00 of debt. With strong nominal Q2 GDP growth, Canadian household debt to GDP ratio fell 0.3 ppts to 101.9%, but has flattened out over the past couple of years.

The big increase in nominal GDP helped dampen government debt ratios in Q2. Gross general government debt (includes all levels of government) dropped to 126.4% of GDP, the first decline in over a year after some one-time factors pushed Q1 higher. And, net debt fell 1.1 ppts to 22.8% in Q2, just slightly above 2023Q1's multi-decade low, though the federal government ratio was steady.

Key Takeaway: Households remain under pressure from higher rates but have adjusted their behaviour, pushing debt ratios consistently lower. Still, the debt-service ratio isn't far from record highs, and could still climb further as mortgage resets continue. Bank of Canada rate cuts will provide some relief, but interest rates are well above levels seen over much of the past five years, pushing debt payments higher. Despite that pressure, overall household balance sheets are in pretty good shape, with ongoing strong income growth providing a helping hand.

Table 1 - Canada — National Balance Sheet Accounts

(percent)

Source: BMO Economics, Haver Analytics