Insights and Market Perspectives

Debt is on the rise in Canada

Author: Portfolio Specialist Group

September 18, 2017

The use of credit continues to trend higher in Canada with household debt as a share of income rising to record levels in Q2. Canadians now owe $1.68 of debt for every dollar of income (or 167.8% to be exact). Making matters worse, this comes in lockstep with the Bank of Canada implementing back-to-back interest rate hikes in July and September, respectively, and hints towards an additional rate increase before year-end.

Today’s consumers are enticed to spend by the historically low level of interest rates, even despite recent central bank rate hikes, and perhaps vindicated by the high value of real estate markets across the country, as household assets grew by $29 billion in the second quarter alone1. This spending binge can be seen from the high level of auto sales, which are on pace to reach yet another record in 2017.

Auto loans to Canadians – Chartered banks (billions)

Source: Bank of Canada, RBC Economics Research, June 2017. * Reflects a re-classification of personal loans to ‘other’ consumer credit.

Perhaps most concerning is who is racking up this debt. Households aged 65+ hold over $30,000 in debt, on average, with 10% of this group accumulating debt in excess of $100,0002. Nearly 25% of Canadian seniors now have a secured line of credit, up from only 4% in 1999 – a credit vehicle with an effective rate generally 2x that of mortgage rates and most often tied to a variable rate. As variable rates continue to rise alongside higher policy rates, it becomes more expensive to service this debt, which is likely to weigh on economic growth as more money is directed to servicing debt and away from more productive sources that would benefit the economy. This also places stress on retirement security for current and future retirees.

Average debt of households 65 years and older (thousands)

Source: Ipsos Reid Canadian Financial Monitor, RBC Economics Research, June 2017

There is a bright side, however, as these higher debt levels are supported in part by higher savings rates, cycle-low unemployment and household assets exceeding outstanding debt balances by nearly 6-12. Additionally, the impact of higher interest rates should not materially impact residential housing in the short term, with close to 75% of Canadian mortgages locked into a fixed rate2. Of course, those refinancing in the medium to long term may experience higher rates, should the central bank continue to tighten.


1Reuters, September 15, 2017
2RBC, June 2017
 Commentaries contained herein are provided as a general source of information based on information available as of September 18, 2017 and should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and the manager accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. Investors are expected to obtain professional investment advice.



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Written by

Portfolio Specialist Group

AGF Investments Inc.

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