The Bank of Canada has identified household debt and housing as two key liabilities to the Canadian economy, however, one strategist says the extent of the vulnerability largely depends on what will happen with interest rates. 

Carolyn Rogers, the senior deputy governor of the Bank of Canada, said in a Nov. 22 speech that household debt, housing and the combined relationship to financial stability are “two vulnerabilities we’re [the central bank] watching closely.” 

“It really depends on where rates are. At the end of the day [a] higher debt burden does make Canada more vulnerable to a weaker economy,” Benjamin Reitzes, the managing director of Canadian rates and macro strategist at BMO Capital Markets, said in a phone interview on Nov. 28. 

However, Canada’s outsized household debt is largely driven by the housing market, according to Reitzes. Assuming Canada avoids a severe economic downturn, Reitzes said the potentially more important factor is the level interest rates will be in the next few years. 

“If they stay at current levels, you're going to have a lot of people refinancing into rates that are substantially higher than when they initially took out their mortgage,” Reitzes saidm, adding that applies to both fixed and variable-rate mortgages. 

Whatever potential vulnerability household debt may present to the Canadian economy in 2023, Reitzes said it could be made significantly worse if job losses occur. 

“The more debt you have the harder it is to carry if you’re in between jobs, for example,” he said. 


Canadian consumer insolvencies, including bankruptcies and proposals, rose 8.3 per cent year-over-year in October, according to Statistics Canada

During the second quarter of this year, Canada’s household debt-to-income ratio increased by two points to 181.7 per cent, according to a Sept. 12 note to investors from Shelly Kaushik, an economist at BMO Capital Markets. 

“Household debt ratios deteriorated in Q2 as debt growth outpaced incomes, despite increasingly aggressive rate hikes from the Bank of Canada. Rising debt service costs and declining household wealth further worsened households’ financial position,” Kaushik said in the note. 


Canada ranks as the third highest among all G20 countries in household debt to gross domestic product, according to Trading Economics, behind only Switzerland and Australia. 

Trading Economics provides economic data and forecasts from 196 countries. 

However, according to Reitzes, people should be cautious when comparing household debt across different countries. 

“They're [household debt figures] not apple for apple measures. And so unless you're really comparing these all the same metrics, it's hard to come to any meaningful conclusion,” he said. 

David Rosenberg, president, chief economist and strategist at Rosenberg Research, said in a phone interview on Nov. 29 that he anticipates the Canadian economy to experience more difficulties than “most other countries” in 2023. 

“Canada has its own problems and the problems are the fact that we have a housing bubble of epic proportions,” Rosenberg said. 

Over 50 per cent of Canada’s household net worth today is tied up in residential real estate, according to Rosenberg, something he says is “beyond the pale.” 

Rosenberg said he is concerned about the new year as housing is the longest-duration asset in the economy and Canada is set to feel the effects of its most aggressive interest rate hiking campaign in three decades. 

“The fallout on the housing market, the fallout on consumer balance sheets is going to come into the full picture in 2023 and the negative wealth effect on spending promises to be spectacular,” Rosenberg said. 


Despite the recent acknowledgment from the central bank on the potential problem household debt can cause, Reitzes said it has been a long-standing issue for over a decade. 

Regardless of how long the issue has persisted, Reitzes said the central bank’s decision to keep interest rates low contributed to the current issue. 

“As much as this is a concern for the Bank of Canada it's something that they helped create. And that's part of the consequence of bringing rates to zero through the pandemic to support the economy, which I get, but at the same time rates were held low for a very long time,” he said. 

One of the consequences of keeping rates at zero is inflationary effects from a strong economy, according to Reitzes. 

“The other is that debt was accumulated through that period because it was very attractive to do so and now we have to deal with those consequences,” he said.