Canada’s debt servicing ratio at record levels in Q3

Household credit market debt as a proportion of household disposable income fell to 181.6% in the third quarter from 181.9% in the second quarter, as Canadian household disposable income (+1.0%) grew slightly faster than credit market debt (+0.8%). In other words, there was $1.82 in credit market debt for every dollar of household disposable income in the third quarter, reported Statistics Canada on Wednesday.

Tima Miroshnichenko

The federal agency said household debt service ratio, measured as total obligated payments of principal and interest on credit market debt as a proportion of household disposable income, rose to 15.22% in the third quarter, increasing from 15.08% in the second quarter as debt payments expanded at a faster rate than household disposable income. Growth in income and debt are not shared equally among all income brackets.

“Since the Bank of Canada started raising interest rates in the first quarter of 2022, the amount of total mortgage interest payments has increased 89.6%. During that same period, the amount of mortgage principal paid has declined by 16.8%. The third quarter of 2023 marked a deceleration in mortgage interest payments (+3.6%) compared with the previous quarter (+5.9%), while mortgage principal payments increased slightly (+0.2%) after five consecutive declines,” it said.

“Households were less wealthy in the third quarter as their net worth—the value of all assets minus all liabilities—shrank $301.2 billion (-1.8%) to $16,168.3 billion. Headwinds, in the form of weaker financial and housing markets, dragged on household wealth; the value of real estate declined after two quarters of recovery, while both foreign and domestic equity markets softened, with the Standard and Poor’s (S&P) 500 Index falling 3.6% and the S&P/TSX Composite Index declining 3.0%. These market contractions pushed the value of households’ total financial assets 2.1% lower (-$196.3 billion), while the value of total non-financial assets fell 0.8% (-$74.5 billion). On the other side of the ledger, financial liabilities, composed primarily of mortgage and non-mortgage debt, increased $30.5 billion from the second quarter. This represented the slowest year-over-year expansion (+3.2%) in household liabilities since 1990.”

Carrie Freestone

Carrie Freestone, Economist with the Royal Bank of Canada, said Canada’s debt servicing ratio hit a new record in Q3 – rising to 15.2% from 15.1% in Q2as past interest rate increases continue to pass through to household mortgage payments with a lag. 

Debt servicing costs will continue to rise with a wave of mortgage renewals still to come. And softening labour markets (the unemployment rate is up 0.8% from the spring) mean ability to pay out of income growth will slow, she said.

“Canada’s household debt levels are high, and increases in interest rates continue to pass through to debt payments with a lag. The household debt service ratio is already at record levels and will move higher as debt payments continue to rise alongside wobbly looking labour markets. And the Canadian economy has already contracted for five straight quarters on a per-capita basis with consumer spending softening. Against that backdrop, further interest rate hikes from the Bank of Canada have become increasingly unlikely and we look for a pivot to gradual rate cuts by mid next year,” added Freestone.

Mario Toneguzzi

Mario Toneguzzi is Managing Editor of Canada’s Podcast. He has more than 40 years of experience as a daily newspaper writer, columnist, and editor. He was named in 2021 as one of the Top 10 Business Journalists in the World by PR News – the only Canadian to make the list