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Statistics Canada Says Higher Interest Rates Are Putting Canadians Off Borrowing

Statistics Canada reported on Wednesday that higher interest rates are discouraging Canadians from borrowing, but increased income levels are helping to offset the rising costs of servicing debt.

In the second quarter, there was $1.81 in credit market debt for every dollar of household disposable income, down from $1.84 in the first quarter of 2023. On a seasonally adjusted basis, the proportion of household credit market debt to disposable income decreased to 180.5 percent in the second quarter from 184.2 percent in the first quarter.

During the most recent quarter, the household debt service ratio, which measures the total payments for principal and interest on credit market debt as a percentage of household disposable income, was 14.79 percent, down from 14.90 percent in the first quarter, when it reached its highest level since 2019.

Statistics Canada noted that household disposable income increased by 2.6 percent in the second quarter, helping to mitigate the impact of higher debt obligations resulting from the Bank of Canada’s rapid interest rate increases since March 2022.

Seasonally adjusted household credit market borrowing decreased to $17.1 billion in the second quarter, compared to $20.4 billion in the first quarter, with demand for mortgage loans reaching its lowest point since 2005.

TD Bank economist Maria Solovieva observed that these declining figures, coupled with rising household wealth and recovering real estate values, offer some positive news about the state of Canadian households in the first half of the year. However, she cautioned that the overall improvements in debt-to-disposable income ratios may not reflect the financial challenges faced by some Canadian households.

Solovieva noted that despite income gains, Canadians were still dealing with elevated inflation levels in the second quarter, and Equifax Canada’s latest data showed increasing delinquency rates on various credit products.

Statistics Canada also pointed out that income increases are not evenly distributed across income brackets, leaving certain Canadians more susceptible to higher debt obligations than others.

Solovieva emphasized the need for the Bank of Canada to closely monitor household credit performance as higher interest rates continue to impact Canadian households throughout the year.

BMO economist Shelly Kaushik added that while a tight labor market in the first half of the year boosted Canadians’ wages, a cooler job market is expected to slow income growth in the coming quarters. Simultaneously, higher interest rates will exert additional pressure on debt servicing, leading Canadians with mortgages up for renewal to curtail their consumer spending, which is anticipated to result in a broader economic slowdown for the rest of the year.

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