Canadian millennials, especially those who own homes, are facing a challenging future as interest rates rise, according to a new report from RBC. The report highlights that rising interest rates will have a significant impact on millennials and younger Generation X adults, making them more susceptible to job losses if the economy slows down. RBC economist Carrie Freestone emphasizes that debt loads are particularly burdensome for working adults compared to two decades ago. In 2019, older millennials aged 35 to 44 had debt-to-disposable income ratios around 250%, compared to approximately 150% for the same age group in 1999. Younger millennials under 35 had debt loads equivalent to 165% of their disposable income in 2019. However, RBC notes that the youngest cohort hasn’t experienced a significant increase in debt-to-income ratio since the late ’90s, with only about one-third of them having a mortgage.
“The millennial generation has been greatly affected by high household debt,” states Freestone in the report. The debt situation has worsened for many Canadians since 2019, as low interest rates at the beginning of the COVID-19 pandemic enabled young first-time buyers to enter the housing market, resulting in increased mortgage debts. According to Statistics Canada, household debt-to-disposable income rose to 184.5% in the first quarter of 2023, compared to 181.7% in the previous quarter. This means that there is $1.85 in credit market debt for every dollar of household disposable income.
With the Bank of Canada’s policy rate rising 4.75 percentage points from the lows experienced during the pandemic, homeowners, particularly millennials, are at a greater risk due to the higher interest rate environment. RBC predicts that the average Canadian renewing their mortgage could see a 25% increase in monthly payments by early 2024, based on current rates for a typical five-year term. The main problem, as explained by Freestone, is that incomes have not kept pace with the impending mortgage shock. The average hourly income has only risen 12% since the start of the pandemic, which is less than half the expected increase in mortgage payments.
As a result, RBC expects that consumption in the middle demographic (millennials and younger Gen X) will significantly decline in the fall, especially if job losses occur. Higher unemployment rates may have a negative impact on demand in the coming year, even though the economy is still holding up despite record rate hikes. Economists anticipate a slowdown in Canada’s economy and an increase in job losses this fall due to the delayed effects of higher interest rates. CIBC’s report suggests that the unemployment rate could rise above 6.0% by early 2024, compared to 5.5% in July. The jobless rate has steadily increased since the summer, rising from near-record lows of 5.0% at the beginning of the year.
Regarding future interest rate decisions, CIBC believes that signs of easing in the labor market this summer will be sufficient to prevent the central bank from hiking rates at its next decision on September 6. However, if unemployment rises as forecasted, it could prompt the Bank of Canada to start cutting interest rates as early as the first quarter of 2024.
In conclusion, Canadian millennials, especially those who own homes, are facing an uphill battle as interest rates rise. The combination of high debt loads and a potential increase in job losses poses significant economic challenges for this demographic.
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