Costs of paying down debt climbed to record while net worth declined
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Canadians continue to be hit by the climb in Bank of Canada interest rates, with the costs of paying down debt rising to a record in the third quarter while net worth declined, according to Statistics Canada household finance data released Dec. 13.
Here are five charts that show how higher interest rates have impacted Canadians, along with economists’ reaction to the data:
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Debt costs rise
The amount Canadians are paying to cover the costs of debt rose to a record in the third quarter of 2023, with the household debt service ratio increasing to 15.2 per cent from 15.1 per cent in Q2, Statistics Canada said.
Most of the increase can be attributed to a record rise in interest payments over the past six quarters, up from 5.9 per cent of disposable income to 9.3 per cent, which amounts to the highest level since 1995, said economist Daren King at National Bank of Canada.
Borrowing costs could go higher still as many homeowners are set to renew their mortgages over the next two years, King said. “This means that the interest payment shock is not over and represents a headwind for the economy over the coming year,” he said.
His view is backed by Royal Bank of Canada economists, who also predict continued rising costs “with a wave of mortgage renewals still to come.”
Those higher costs will continue to pressure consumer spending, said Shelly Kaushik, an economist with Bank of Montreal, in a note to clients.
Household net worth declines
Household net worth fell by $301.2 billion to $16.2 trillion, down from $16.3 trillion in the second quarter, Statistics Canada said.
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“The financial weather turned stormy in the third quarter as both financial and non-financial asset values declined, dragging down total household wealth,” said Maria Solovieva, an economist with Toronto-Dominion Bank.
Real estate equity drops
Canadians’ equity in real estate fell by 1.7 per cent in the third quarter as home prices dropped, said Statistics Canada.
Home equity is now more than 10 per cent below what it was when home prices peaked in the second quarter of 2022, said RBC economist Carrie Freestone. Still, it is 57 per cent higher than in the fourth quarter of 2019, just before the start of the pandemic.
Equity could fall further with Canadian home prices on track to decline more than three per cent in the fourth quarter, said TD’s Solovieva.
Mortgage interest increases slow
Since the Bank of Canada started hiking interest rates Canadians are paying more interest on their mortgages with less going toward the principal. But the increase in interest payments slowed to 3.6 per cent in the third quarter compared with 5.9 per cent in the second quarter, while principal payments increased by 0.2 per cent after falling for five consecutive quarters, Statistics Canada said.
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The shift comes from homeowners negotiating longer amortization periods to “keep their payments (interest and principal combined) from increasing too drastically,” Charles St-Arnaud, chief economist at Alberta Central, said. “However, this comes at the expense that households will remain indebted for longer.”
Debt levels fall
Income outpaced growth in debt, leading to a decline in the debt-to-income ratio, which now sits at 181.6 per cent compared to an upwardly revised 181.9 per cent in the prior quarter. That means for every dollar of household disposable income in the third quarter, there was $1.82 in debt, said Statistics Canada.
Higher borrowing costs are expected to continue to be a “damper on loan demand, which should lead to continued modest improvement in the debt-to-income ratio,” Kaushik at BMO said.
If income had not grown by one per cent in the quarter, St-Arnaud estimates the debt-to-income ratio would have risen to 220.9 per cent.
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