Canada’s household debt-to-income ratio fell 3.8 ppts to 180.5% in Q4 (seasonally adjusted), from an upwardly revised 184.3% in the prior quarter. The unadjusted ratio dropped 2.4 ppts to 180.7%. On an adjusted basis, a 3.0% jump in disposable income was only partially offset by liabilities edging up 0.8%. The former was propelled up by a one-time boost in government transfer payments. Meantime, growth in mortgage loans was the slowest since 2020 amid the Bank of Canada’s aggressive rate hikes. Looking ahead to Q1, mortgage demand likely remained restrained as ongoing affordability challenges keep a damper on housing demand.
The household debt service ratio (interest and principal as a share of disposable income) ticked up from 14.2% to 14.3% in Q4. Higher interest rates pushed debt payments up 4.4%, outpacing the increase in disposable income. StatCan expects debt payments to remain elevated as some variable-rate mortgage-holders reach their trigger rate and fixed-rate mortgage-holders near the end of their terms.
Meantime, household net worth declined to 980.6% of disposable income, down over 110 ppts from its record high in Q1/22. Still, the value of household net worth rose from the recovery in equities, though the increase was partially offset by the sagging housing market. Owners’ equity in real estate fell from 74.1% to 73.6% in Q4; we anticipate further cooling in the housing market will weigh on that ratio in the coming quarter.
Meantime, government debt ratios continued to improve on the back of higher nominal activity. Gross general government debt (includes all levels of government) declined for the eighth straight quarter, by 1.6 ppts to 125.3% of GDP, though it remains about 10 ppts above pre-pandemic levels. Net debt dropped 0.9 ppt to 25.9% in Q4, roughly in line with the pre-pandemic range.
Key Takeaway: Household debt ratios improved in the fourth quarter as income rose faster than debt, as the latter was weighed by slowing growth in mortgage demand in a rising interest rate environment. High household indebtedness is a key vulnerability for the Canadian economy, and the Bank of Canada will be watching closely as it weighs what's next for monetary policy.