Household debt includes both consumer debt and housing loans. In this article, we’ll focus on the debt ratio of Canadians in 2023. How has it evolved? What are the consequences?
An increase in the first half of 2023
In Canada, debt trends were marked by an increase in the first half of 2023. Consumer debt alone reached $2.4 trillion.
During the second quarter, non-mortgage debt increased, averaging $21,131. Credit card balances also reached record levels. 107.4 billion. On the other hand, credit card spending slowed during this period.
According to analysts, Canadians have adapted their spending habits. Indeed, they have had to cope with economic volatility. However, there is also an influx of new credit users. This partially masked the increase in non-mortgage debt.
Let’s take the number of active credit consumers with less than 2 years’ activity. This has risen significantly. The latter was 37.1% for the second quarter. In addition, their non-mortgage debt fell by an average of 10.2%. The comparison is made with the same period in 2022.
Now let’s look at consumers with a credit history of more than 2 years. Here, non-mortgage debt rose by 1.9%. It reached an average of $22,710.
Consumers are making more cautious credit decisions. They look for the best mortgage offers when they renew. They also sometimes opt for other credit products. They prefer lower rates to finance major purchases.
In addition, fewer consumers were able to pay their credit card balance in full each month. By June 2023, almost 500,000 more credit users were in this situation. The comparison is with 2022. Many households face challenges in managing debt.
A decline towards the second half of 2023
Their debts have fallen slightly in relation to their income. However, the cost of servicing this debt has risen sharply.
Total indebtedness fell marginally to 181.6% in the third quarter from 181.9% in the previous quarter. In other words, for every dollar of revenue, the debt is $1.86.
This change is explained by a 1.0% increase in disposable income. At the same time, credit market debt rose by 0.8%. However, the household debt service ratio rose to 15.22%. It was 15.08% the previous quarter. There is a reason for this increase. Debt payments grew faster than disposable income.
The evolution of Canadian household debt over the past 20 years
We’ll now take a closer look. The statistics speak for themselves. Household debt has risen sharply over the past 20 years. Their debt-to-income ratios since 2000 are shown below:
- 2000 : 107,55 % ;
- 2018 : 184,7 % ;
- 2019 (before the pandemic): 181.1% ;
- 1st quarter 2021: 172.3% ;
- 4th quarter 2022: 181.7% ;
- 4th quarter 2023: 186.2%.
The ratio dropped slightly around the time of the pandemic. Restrictive measures during this period forced savings. Some households took the opportunity to reduce their debts.
The consequences of high debt levels
High debt levels increase the risk of recession. This could lead to an increase in defaults, and hence credit losses. Especially if it’s accompanied by high unemployment. Banks could then reduce their lending. Whether for businesses or households. This risks intensifying the recession.
In addition, debt servicing costs are rather high in Canada. In addition, the level of land equity is low in the country. This increases the risk of default. This seems inevitable if household incomes fall.
Among G7 countries, Canada has the highest rate of household debt. This situation is weakening the country’s economy. This is likely to fall in the event of a global economic crisis.
Conclusion: several factors come into play
The impact of debt depends on several factors. These include policies to manage household debt. Both economically and financially. Fortunately, they can be avoided by adopting the right strategy.
