Transcript 0:00 Well, here's a couple of things I'm not overly proud of saying. Uh, Canadian households carry more debt relative to their disposable income than those in any other G7 country. Not a good thing. 0:13 Also, consumer insolvencies hit 140,457 filings last year. That is the highest since 2009. 0:23 So I'm gonna call those two red flags, and by the sounds of those two things, you might think that we're standing on the edge of a debt crisis. Well, there's a report out recently from the C.D. Howe Institute. 0:33 They say these are important warning signs, but they do not by themselves establish a systemic debt crisis. 0:41 I suppose we could take a little bit of solace in those words and, uh, take them as a sort of a sliver of good news. 0:47 They don't say that we have a systemic debt crisis, at least not by the facts as they've laid them out themselves. But of course, there is a deeper story that I feel we should unravel. 0:58 Now, when you break the national numbers apart, you're gonna find that there are specific groups of Canadians that are under severe strain. The average is hiding them overall. 1:08 And in the video today, I'm gonna walk you through who this is hitting the hardest, and we're gonna look at how it affects the broader economy. So let's start with the number that most people quote. 1:18 That is the household debt to disposable income. Now, back in the early 1990s, that was below 100%. It crossed that line in late '93 and climbed to about 160% by the financial crisis. 1:34 Now, that peaked out at 188% in the third quarter of 2022. As of the second quarter of this year, it's sitting at 176.4%. So that is a huge number, and it gets a lot of attention. 1:48 But the report here argues that it is the wrong gauge for what's happening right now. It says the debt to income tells us how much exposure has built up over the decades, but that moves pretty slowly. 2:00 The better measure, they say, is the debt to service ratio, and that is the share of your disposable income that goes into principal and interest payments. 2:09 And they argue that that's better because it reacts within a few quarters when interest rates rise, when mortgages are renewed. So they're saying it's a better gauge. 2:18 And earlier research has found that it is one of the most reliable early warning signs of financial crisis in Canadian data. So you might ask, what does it say? Good question. 2:30 Between 1990 and 2007, the debt service ratio averaged about 12.3%. It hit a record of 15.2% in 2023, when we saw the Bank of Canada's hikes working their way into mortgage renewals. 2:43 Now since then, it's come back down to 14.5% in the second quarter of 2026. That is slightly below its pre-pandemic level of 15%. So again, I'm gonna take that as a little bit of good news. 2:56 At the aggregate level, Canadians are still carrying their debt. They're still managing. That is another silver lining. And internationally, we're not at the bottom of the pile. 3:06 In the latest data from the Bank for International Settlements, Canada's debt service ratio sits below Australia and Norway. 3:13 It's well above the US, the UK, France, and Germany, and we see ratios there near multi-decade lows. 3:20 Now, the shorter mortgage terms that we have here in Canada does explain a lot of that because the rate changes will reach Canadian borrowers typically within a few years. 3:30 So when I look at the report, there is a line that really jumped out at me. The Canadian economy is doing well enough on average to conceal pockets of acute stress. 3:42 And I think that is probably the most important sentence in the whole report. It's not that nothing bad is happening, but more that it's hidden. 3:50 When we look at the savings rates by income group in 2025, the top 20% of households saved 34% of their disposable income. The next group down saved 16%. So I'm gonna say, so far so good. 4:05 But the middle quintile spent 12% more than it earned, the second quintile spent 32% more, and the lowest quintile spent more than twice its disposable income. 4:17 Now, some of that bottom group is retirees that are drawing down pensions. That's normal. But the trend here is what I think should get our attention. 4:25 Since 2010, saving rates have risen in the top two quintiles and have fallen in the bottom three. By 2023, the bottom three had dropped well below their pre-pandemic saving rates, while the top two stayed above theirs. 4:39 So how does this national saving rate look stable through all of that? Well, it is that 4.3% in 2010, 4.9% in 2025. It's actually gone up. 4:50 This is the arithmetic behind our central claim that saving at the top offsets dissaving at the bottom in the national accounts, so the average conceals the split. 4:59 And I think that would be, uh, one definition of the K-shaped economy that we're experiencing here wrapped up into that one sentence. 5:06 Canadian household net worth just hit a record, a little over $19.1 trillion, but most of those gains went to the top 20% of households, and younger Canadians who don't own homes have barely shared in them at all. 5:20 And that takes me now to the generational divide. The Bank of Canada asks Canadians how likely they think they are to miss a debt payment over the next three months. Here's what came back. 5:32 In the fourth quarter of 2025, Canadians aged 25 to 54 reported a record 27% probability, and respondents aged 18 to 24 reported close to 50%. So that's pretty much a coin toss for the younger adults. 5:48 Canadians 55 and older put the odds at 0.7%. And if you're not paying close attention to this chart here, it would be easy to miss that line. It's the blue line that almost looks down at the bottom here, like the X axis. 6:02 It barely registers when you compare that with the younger crowd. 6:06 Now, younger borrowers tend to carry credit cards, they have other unsecured debt, and they don't have that home equity cushion that older Canadians built up over the decades of rising prices. 6:16 So that puts them at a disadvantage. 6:18 Now, I do wanna take a closer look at mortgages, because this is where the rate cycle hits the hardest, and most fixed rate mortgages that were taken out before 2022 had five-year terms, and that is why the higher rates have reached these households gradually, right? 6:33 That's happened over several years, and the renewal wave still has some distance to run. 6:39 Although the largest part of the renewal wave has passed, about 12% of all outstanding mortgages are pre-pandemic rate mortgages still due to renew, with payments expected to rise roughly 15%. 6:51 So across the entire system, the report puts the hit at less than a 2% rise in scheduled payments. So that's about a quarter of a point on the debt service ratio, and the income growth is expected to offset most of that. 7:04 Now, that is for the economy as a whole, right? And that's pretty manageable. 7:09 But when you look at individual families that might be facing, let's say, a 15% jump in their mortgage payments, that is a very different conversation. 7:17 Another thing to consider here is that those families aren't spread evenly across the country. The strain here concentrates mostly in Toronto and Vancouver. We got mortgage arrears in the Toronto area. 7:28 They have more than quadrupled from their post-pandemic lows. The Bank of Canada finds that renewal stress is most acute among Toronto borrowers who took out mortgages in '22 and '23. 7:40 Condo markets in both of those cities are under a lot of pressure right now, and there is a specific group that is facing a steep, steep reset here. 7:49 Borrowers who locked in near 2% in 2020 and 2021 are renewing at roughly twice that today, lifting payments sharply for a cohort that borrowed at the peak of the market. 8:01 Something else to consider here too is that the best jobs are concentrated in two very expensive cities where the housing supply hasn't kept up. So you have people moving there for work. 8:11 They take on bigger mortgages than they would anywhere else. 8:14 The report says, "As long as the best paying jobs remain concentrated in these two supply constrained markets, new entrants will keep joining the leveraged tail, and the tail risk problem will be structural rather than cyclical." 8:27 Now, I don't want to, uh, beat a dead horse here [laughs], but there's one more blind spot that I do wanna flag. I sort of mentioned it at the outset of the video. We know that insolvencies are rising. 8:37 Filings went from 123,233 in 2023 to 137,295 in 2024, and up again to 140,457 in 2025. 8:51 So that, to me, shows, uh, great signs of distress out there amongst our community. 8:56 Now, my key takeaway from this is that Canada doesn't have a household debt crisis in the national numbers, but we do have a concentrated debt problem. 9:07 It sits with highly leveraged homeowners in Toronto and Vancouver, with younger Canadians who are carrying debt without having the protection of home equity behind it. 9:17 It also sits with lower income households that are spending more than they earn. Now, I wish I had better news to share. 9:24 Some things I do on the channel here are positive, some of them are negative, but the reality of where things are today and heading into the end of 2026, uh, are a little bit painful in some respects. 9:34 Now, I will leave a link to the full CD Howe report in the description if you wanna have a look at that and go through the data yourself. 9:41 Now, also, I would urge you to subscribe to my Pulse newsletter that comes out on the weekends. Keeps you up to date with the economic news and other key stories of the week. 9:49 I'll put a link in the description here so you can join us there. And don't forget to give this video a thumbs up. As always, I say thank you for watching, and we'll see you in the next video.
