Over the past several months, the Bank of Canada has implanted several reductions in the banks central interest rate, the latest of which (December 11th) saw a rate reduction of one-half a percentage point bringing the rate down to 3.25%. See my prior blog posted title: Bank of Canada Reduces Interest Rate: What It Means for You.
It is important for consumers to realize that the current rate of 3.25% is the Bank of Canada’s “policy interest rate.” This rate is essentially the starting point for setting interest rates in the overall economy, rates that affects Canadian consumer purchases such as car loans and leases, credit cards, lines of credit and in the case of real estate, mortgage loans. While there is a connection between the Banks “policy interest rate” and the “rate of interest” we as consumers pay to borrow money for purchases, these two rates do not match, they are not one in the same.
With each rate reduction, that is always a sense of euphoria especially within the real estate landscape. The overall belief seems to be that as mortgage rates drop, it will reignite a sluggish real estate market such as the one we are currently in, wherein the demand for housing will increase, sales will rebound, and prices will rise. While there may be some truth to that in specific areas of the country and or market segments, it would be naïve to think that home and other real estate sales will start to increase over night and we can start singing “Let The Good Times Roll.
Prior to the latest “policy interest rate” reduction on December 11th, the Bank of Canada had made prior rate reductions of one-quarter of one percent (.25%) in June, July, September and October. Despite these reductions albeit minor ones, real estate sales in the Southern Georgian Bay area in June, July and August were well below 2023 and this was also the case in the prior months April and May as well.
Sales in our area did rebound in September through November versus the same months year year some of which may perhaps be attributed to lower mortgage rates. At the same time other factors have also played a role in stimulating sales during the last three months.
- The inventory of properties listed for sale on the MLS® System in our area is the highest level we have seen since 2016.
- The year-to-date median MLS® sale price for homes in the area at the end of November was just over $720,000, the lowest we have seen in 5 years.
While the reduction in the borrowing rate for mortgages has no doubt helped, based on the above it is clear that Buyers have plenty of choices when searching for a home giving them, more negotiating leverage. Prices in fact have come down since the robust market activity we saw in 2020 and 2021 during the COVID 19 pandemic when housing inventory was low and properties often sold above their respective asking prices due to multiple offers. Such is not the case in today’s market.
The chart below created by the data and intelligence gathering company Statista and using data from the International Monetary Fund, shows the level of household debt including Canada and several other countries. This chart measures household debt as a percentage of a country’s Gross Domestic Product (GDP). GDP is the total value of a country’s economic output for all finished good and services. When household debt is 100% or higher compared to GDP as is the case for Canada and Australia, that means the amount of money owed by consumers is more than the value of those country’s economic output.
A Global Snapshot: Consumer Debt in Canada Compared to the U.S. and Beyond
Consumer debt has become a critical economic indicator worldwide, reflecting how households manage their finances in a rapidly changing economy. In Canada, the levels of consumer debt have garnered attention for their steady climb, especially when compared to other nations like the United States.
Consumer Debt in Canada: A Closer Look
Based on information gathering by Statista, in 2024 Canadian households carry an average consumer debt-to-income ratio of approximately 180%, meaning Canadians owe $1.80 for every dollar of disposable income. This figure, among the highest in the world, underscores the heavy reliance on credit to finance daily expenses, housing, and major purchases.
Key Contributors to Consumer Debt in Canada:
- Mortgage Debt: Housing markets in major cities like Toronto and Vancouver drive a significant portion of the debt burden. The high cost of real estate often forces homebuyers to take on substantial mortgages.
- Credit Card and Personal Loans: Many Canadians also rely on credit cards and personal loans for non-essential spending and emergency expenses.
- Rising Interest Rates: Recent increases in interest rates have amplified monthly payments on variable-rate loans, further straining household budgets.
How Does Canada Compare to the U.S.?
Prior to entering the real estate profession, my job required a relocation to the U.S. (Chicago) where I lived from 1990 to 1994. During that times, I learned how many Americans including my neighbours, depended and somewhat lived on credit. It was not uncommon to have a second or third mortgage on your house to finance a new car, boat or other expensive purchase. In the U.S., the interest you pay on your mortgage is tax deductible. That being the case borrowing money against your home was almost encouraged as the attitude was, “I can write it off.” That may have seemed like a good idea at the time but with the global financial crises of 2008, the U.S. housing market crashed and many major lenders with massive amounts of mortgage debt went under. For many Americans it was a hard lesson. As per the chart above, the U.S. still has a relatively high level of consumer debt yet they are well below Canada.
In comparison, Canada versus the U.S. presents a different picture when it comes to consumer debt:
- Debt-to-Income Ratio: Americans have a lower average consumer debt-to-income ratio, hovering around 100-110%, significantly below Canada’s 180%. This means U.S. households typically owe just over a dollar for every dollar of disposable income.
- Key Differences:
- Housing Market: While housing is a significant contributor to debt in the U.S., the market is generally more affordable in many regions compared to Canada.
- Student Loans: Americans carry higher levels of student debt, often making up a larger share of their total consumer debt compared to Canada.
- Consumer Behavior: Canadians tend to borrow more for housing, whereas Americans may focus borrowing on a mix of housing, education, and consumer spending.
A Global Perspective: Where Does Canada Stand?
Canada’s high debt levels place it among the most indebted countries globally. Here are some comparisons:
- Australia: Similar to Canada, Australia also experiences high levels of household debt, with a debt-to-income ratio of around 190%. Like Canada, this is driven by an expensive housing market and reliance on credit.
- United Kingdom: The UK’s debt-to-income ratio is lower, around 130-140%, indicating more conservative borrowing habits.
- Germany: Germans tend to be much more debt-averse, with a debt-to-income ratio of around 90%. Cultural attitudes toward saving and stricter lending practices contribute to this lower figure.
Why Does This Matter?
High consumer debt levels can make households and economies vulnerable to financial shocks, such as sudden interest rate hikes, unemployment, or a housing market correction. In Canada:
- Economic Growth: High debt often means less disposable income available for spending, which can slow economic growth.
- Financial Stability: Heavily indebted households are more likely to default during economic downturns, which can ripple across the financial system.
- Future Generations: High debt levels may constrain younger Canadians’ ability to save, invest, or purchase homes.
What Can Canadians Do?
Managing debt in a high-debt environment requires proactive planning. Here are some steps to consider:
- Budget Wisely: Track expenses and prioritize paying down high-interest debt like credit cards.
- Plan for Interest Rate Changes: Ensure your budget can handle potential increases in borrowing costs.
- Seek Professional Advice: Financial advisors can help create tailored debt management plans.
Conclusion
While Canada’s consumer debt levels are high compared to other countries, understanding the drivers and implications of this debt is the first step toward managing it effectively. For Canadians, staying informed and adopting smart financial strategies can help mitigate risks and build a more secure financial future.
As 2024 ends and we head into 2025, lower interest rates are a welcome sight to many Canadians. Will lower mortgage rates spark an increase in real estate sales in the year ahead? Some believe it will but at the same time with consumer debt as high as it is that is a fact we cannot overlook. As real estate professionals we all need to work closely with Sellers and especially with Buyers to ensure they do not overpay and take on additional household debt that may jeopardize their financial position.
As always I welcome your comments and do not hesitate to Contact Me, rcrouch@sothebysrealty.ca or 705-443-1037 for a no obligation consultation of your real estate selling or buying needs and objectives in 2025.
NOTE: The author is a Broker, Market Value Appraiser-Residential with Sotheby’s International Realty Canada and a Past President (2008) of the Lakeland’s Association of REALTORS®.