"Higher and Longer" Interest Rates Hurt Canada's Economy, Five Charts to See

Household finance data released by Statistics Canada on December 13 showed that rising interest rates from the Bank of Canada continued to hit Canadians, with the cost of paying down debt rising to record levels in the third quarter while net worth fell.

Here are five charts illustrating how Canadians are coping with the Bank of Canada's rising interest rates, and how economists are reacting to the data.

The rising cost of debt

In the third quarter of 2023, the amount paid to cover the cost of debt reached a record high, and Statistics Canada said the household debt service ratio rose to 15.2 per cent from 15.1 per cent in the second quarter.

National Bank economist Daren King said interest payments have hit record highs in the past six quarters, rising from 5.9% of disposable income to 9.3%, the highest level since 1995.

Many homeowners will refinance over the next two years, and Mr. King said borrowing costs were likely to rise further, "meaning the interest payment shock is not over and will weigh on the economy in the year ahead."

Household net worth decreases

Household net worth fell by $301.20 billion in the third quarter, to $16.20 trillion from $16.30 trillion in the second quarter, the statistics bureau said.

"The value of both financial and non-financial assets fell in the third quarter, weighing on total household wealth," said Maria Solovieva, an economist at TD Bank in Toronto.

Real estate net worth decreases

Due to the decline in home prices, the Statistics Bureau said that Canadians' real estate net worth fell by 1.7% in the third quarter.

RBC economist Carrie Freestone said home equity is now below 10% after home prices peaked in the second quarter of 2022. However, it is still 57% higher than in the fourth quarter of 2019 (before the epidemic).

Mortgage interest growth slows

Since the Bank of Canada began raising interest rates, Canadians are paying more on their mortgages and less on principal. But growth in interest payments slowed to 3.6 per cent in the third quarter, compared with 5.9 per cent in the second quarter, and principal payments increased 0.2 per cent after five consecutive quarters of declines, the statistics office said.

The change comes as homeowners negotiate longer amortization periods to "prevent their payments (interest and principal combined) from increasing too dramatically," said Charles St-Arnaud, chief economist at the Central Bank of Alberta. "However, this is at the expense of households remaining indebted for longer."

Declining debt levels

Revenue outpaced debt growth, leading to a decline in the debt-to-income ratio, which now stands at 181.6 percent, compared with an upward revision of 181.9 percent in the previous quarter, the statistics bureau said.

Higher borrowing costs are expected to continue to act as a "constraint on loan demand, which should lead to continued gradual improvement in the debt-to-income ratio," Kaushik, an economist at Bank of Montreal, said in a note to clients. If revenue does not increase by 1 percent in the quarter, San Arnault estimates that the debt-to-income ratio will rise to 220.9 percent.