Canadian income inequality reaches record high despite cooling measures

Canadians prioritizing debt interest payments

The report also suggests that Canadians are choosing to only pay off the interest on their debt.

This is most strongly indicated by an increasing interest-only debt service ratio. Those between the age of 45 and 54 saw a debt-to-income ratio of 12.2%. An interest-only debt service ratio represents how much of a household’s disposable income is being put towards paying off existing debt. Households with a major income earner between the age of 45 and 54 also took on the highest overall debt-to-income ratio of any group at a whopping 260.4%.

This means that this demographic owed around $2.6 in credit market debt for every dollar of household disposable income that quarter.

Taken together, these changes show that despite an increase in average income, many younger Canadians are struggling to make more than minimum payments due at least in part to rising interest rates.

“As high interest rates and housing cost pressures persist, households may be further strained in their ability to make ends meet without going further into debt,” the report said.

This comes in the wake of another BoC policy interest rate drop on September 6, which was intended to help drive more payments towards the principal rather than towards interest.

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Canada’s youngest households de-leveraging mortgage debt

Overall, Canadian households under 35-years-old were the only age bracket to see a decrease in mortgage-related debt since Q4 2022.

“Prospective homeowners may be turning away from the housing market due to affordability concerns,” said the report. “As well, the youngest households may be receiving financial support from family to help them cope with the cost of living and reduce their debt obligations.”

Younger households may now be relying on their parents’ wealth to make ends meet and reduce debt. Households aged 55 plus saw an increase in mortgage debt of around 6.5%, which may be the result of helping their children with purchasing and maintaining a home.

What’s more, Canadian women have children at a mean age of 31, according to Statistics Canada. This means that women who had their children and are now in the 55-to-64 or 65 plus age bracket will have children between the ages of 24 and 34. Again, this is the only demographic that saw de-leveraged mortgages.

These trends are supported by a Royal Bank of Canada survey on Canadian grandparents supporting their adult children and grandchildren.

All told, 21% of Canadian grandparents surveyed were helping to support at least one adult child.

Of those surveyed, 54% said this help was needed on a monthly basis, according to RBC.

Canada’s least wealthy see net worth drop

Many Canadians see home ownership as a path to wealth and intrinsically tied to increasing their net worth, with 73% of Canadians flagging real estate as the best investment for 2024, according to a survey by RE/MAX.

Low income earners in particular, or those in the bottom 40% of income quintiles, can see home ownership as a way to long-term financial freedom. However, recent trends in real estate mean those who’ve bought into this trend are seeing a hit to their net worth.

Those in this income bracket who held or acquired real estate saw an increase in the debt to finance those assets of 6% while their value only grew by 2.6%. As a result, their net worth year-over-year dropped by 1.4% compared to 2023. This comes out to a net worth decline of $990 on average, according to Statistics Canada.

By comparison, the top 20% of Canadian earners saw their net worth increase the fastest out of any income bracket at 2.3%, driven primarily by gains in financial assets, not real estate.

In the past, home ownership was a significant driver for accumulating wealth in Canada. Almost half of all household wealth generated in the past 30 years was due to real estate, according to RBC.

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Small gains year-over-year for low income earners

With that being said, there were some gains made over the second quarter of 2024.

Canadians in the bottom 20% of income distribution saw an average wage growth increase of $417 (up 14.3%). This was primarily for those working in health and education, the service sector and professional and personal services.

This offset an interest increase on mortgages and credit of $218 (up 17.6%).

Meanwhile, top earners saw one of the largest increases in disposable income, up 7.6% from the same time last year.

If anything, the slowest gains were in the middle band of Canadian incomes. Overall investment gains were outpaced by interest and credit payments. The big hits were higher spending driven by increased housing and utility costs, according to Statistics Canada.

The BoC also offers some hope. According to their 2022 Income Inequality report, those with the lowest income have seen the biggest increases in the last five years, primarily driven by real estate holdings and financial assets.

The next Statistics Canada report on the distribution of household economic accounts will be released on January 30, 2025.

Sources

1. Statistics Canada: Nearly half of Canadians report that rising prices are greatly impacting their ability to meet day-to-day expenses (August 15, 2024)

2. Bank of Canada: Income Inequality in Canada (2022)

3. Bank of Canada: Policy interest rate

4. Statistics Canada: Parents and children in the Canadian housing market: Does parental property ownership increase the likelihood of homeownership for their adult children? (November 20, 2023)

5. Statistics Canada: Mean age of mother at time of delivery (live births) (Sept 25, 2024)

6. Royal Bank: Proof Point: Canadian renters face higher hurdles to accumulating wealth than homeowners (March 14, 2024)

7. RE/MAX: Alternative Home Ownership Models in the Canadian Housing Market

8. RBC: Proof Point: Canadian renters face higher hurdles to accumulating wealth than homeowners (March 14, 2024)