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Canada’s Debt Challenges and Their Economic Impacts

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New data reveals growing concerns about the impact of elevated interest rates on Canada’s economy, as debt levels remain a persistent challenge, according to a recent report from Edge Realty Analytics. As debt payments consume more income, households and businesses have less to spend or invest, leaving the economy more vulnerable. While recent indicators such as labour market performance suggest resilience, there are some underlying financial strain points that suggest potential vulnerabilities.

Household Debt and Credit Stress

The Edge Realty Report noted recent findings from the Bank of Canada that show an increase in households falling behind on at least one credit product, reaching the highest level since the second quarter of 2020. This highlights a significant pressure point within the economy, compounded by the delayed impact of rate increases for many borrowers. According to the Bank’s data, nearly half of mortgage holders have yet to face the full financial impact of higher rates, with many set to renew in an environment of elevated borrowing costs.

Side-by-side line graphs: Left shows household debt service ratios for Canada and US from 1990-2020. Right shows household debt-to-GDP ratio for both countries, 1990-2020. Canada leads both.

Line graph showing the percentage of indebted borrowers behind on payments for over 60 days from 2015 to 2024, with noticeable peaks around 2018 and 2023, and a dip in 2020.

Source: Edge Realty Analytics

Fixed Rate Mortgages

While the Bank of Canada has reduced rates in recent months, fixed mortgage rates, which are tied more closely to bond yields than to the policy rate, have not moved lower since September. As a result, borrowers renewing fixed-rate mortgages in the next few years could see monthly payments rise by around 35%. 

Other Concerns

The private sector added jobs in December but showed more subdued growth compared to the public sector, while wage gains slowed in the final quarter of 2024, further limiting consumers’ ability to absorb rising costs. The Edge Realty Analytics report notes other details in the December labour force statistics that temper their initial positivity. A significant portion of job gains—62,000 out of 91,000—went to individuals over 55, while 23,000 positions fell under the volatile self-employment category.

Despite these challenges, Canada’s economy has shown signs of resilience, including stronger-than-expected job growth and relatively stable hours worked. However, the persistence of debt overhang across key sectors indicates potential limitations to that resilience, particularly if economic conditions soften or rate relief proves insufficient in easing financial pressures. 

 

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