Surge in Income and Lower Borrowing Rates: How Canadians Thrive amidst Rising Interest Rates- Nation’s Report

Statistics Canada revealed that higher interest rates are discouraging borrowing among Canadians, although increases in income are helping to offset the impact of higher debt-servicing costs.

According to Statistics Canada, in the second quarter, the ratio of credit market debt to household disposable income decreased to $1.81 from $1.84 in the first quarter of 2023.

The proportion of household credit market debt to household disposable income, on a seasonally adjusted basis, fell to 180.5% in the second quarter from 184.2% in the first quarter.

Meanwhile, the household debt service ratio, which measures total obligated payments of principal and interest on credit market debt as a proportion of household disposable income, decreased to 14.79% in the most recent quarter from 14.90% in the first quarter, when it reached its highest point since 2019.

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

Seasonally adjusted household credit market borrowing decreased to $17.1 billion in the second quarter from $20.4 billion in the first quarter, with mortgage loan demand dropping to its lowest level since 2005.

TD Bank economist Maria Solovieva remarked in a client note that these declining figures, combined with rising household wealth and recovering real estate valuations, “bring 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 “conceal the struggles faced by some Canadian households.”

Earnings gains are not evenly distributed across income groups, as noted by StatCan, leaving some Canadians more susceptible to higher debt obligations than others.

“The Bank of Canada will need to closely monitor household credit performance as higher interest rates continue to impact Canadian households this year,” wrote Solovieva.