credit and debt
03. credit & debt Household debt is swelling in Canada, alongside rising interest rates. And it’s not just mortgage debt that’s growing, consumer credit is too.
INDEBTED TO MORTGAGE CREDIT
It came as no surprise that Canadian households took on a historically large amount of debt during the pandemic; after all the Bank of Canada suppressed interest rates at all-time lows to encourage exactly that. Indeed, the low rate environment in 2020 and 2021 served to disincentivize saving and incentivize borrowing (and spending). What may be a little more surprising is that Canadians most recently piled on even more debt despite elevated (and rising) borrowing costs. Canadians added $180 billion to their total debt over the past four quarters up to Q2 2022, which was 8% higher than the previous four quarters when they added $167 billion. In fact, in the most recent quarter alone, Canadians took an additional $70 billion in debt, the second highest total ever recorded in Canada.
Mortgage debt continues to be the main driver in household credit (at 86% over the past four quarters) but that’s lower than the previous four quarters and the reason is the change in consumer credit. In the past four quarters, Canadians have added close to $25 billion in consumer credit, with close to $15 billion of that in the most recent quarter. In the previous four quarters, Canadians subtracted $9 billion in consumer credit as they actually paid down far more credit card debt than they added. With consumer credit usually carrying significantly higher interest rates, this will be something to keep an eye on. The following sections will explain why Canadians are more susceptible to interest rate increases than they may have been in the past, but even still it is not as alarming as it might seem. That said, there will be many in Canada who will be adjusting their budgets in order to service this ever-growing debt load.
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