Mounting debt levels introducing existential risks for Canadian households: observer

Canada's current housing bubble might be its largest ever, says MRB Partners global strategist

Mounting debt levels introducing existential risks for Canadian households: observer

The unprecedented high levels of debt that Canadians currently hold will place a significant number of households at risk, especially if mortgage rates continue to rise, according to Phillip Colmar, managing partner and global strategist at MRB Partners.

Data from Statistics Canada showed that household credit market debt as a proportion of disposable income spiked from 181.7% in Q4 2022 to 184.5% in Q1 2023. Canadian households borrowed an estimated $16.5 billion in the first quarter, with mortgage debt accounting for $11.2 billion.

The agency said that the gains coincided with the Bank of Canada’s rate hike campaign, which pushed the central bank’s policy rate to a 22-year high of 5%.

Colmar warned that taking these facts into account, “Canada is probably sitting on the largest housing bubble of all time,” he said in an interview with BNN Bloomberg earlier this week.

 “The worst part for a housing bubble is when you have [a] credit bubble underneath it,” he stressed. “The amount of Canadian leverage into the system versus incomes is pretty astronomical — and we’ve seen debt serving going up dramatically.”

 Colmar said that it’s only a matter of time before policy fails in stopping the spectacular collapse of these unsustainable conditions.

“There is definitely a risk here that if mortgage rates go higher or unemployment were to rise or we hit the next recession, then this thing does end up in a deleveraging cycle.”

Households might allocate more of their budgets towards debt servicing

TD economist Maria Solovieva said in a recent note that debt servicing costs are likely to continue rising rapidly for the rest of 2023 before peaking in the second half of 2024.

“Interest rates are now expected to rise and remain elevated for longer,” Solovieva said. “This will create additional headwinds for households with a high sensitivity to interest rates (such as variable rate mortgage holders) and could result in higher delinquency rates in the future.

“The Bank of Canada will need to maintain a close watch on household credit performance as higher interest rates continue to weigh on Canadian households this year.”