Canadian household debt isn’t just a risk to overindebted borrowers, but a growing risk for financial stability. That’s one of the key takeaways from the IMF’s latest report on Canada, which finds the financial system resilient overall. However, the agency flags elevated household debt as a vulnerability to the broad economy that risks amplifying future shocks.
Canadian Housing Is A Financial Stability Risk
Canadian households owe a mindboggling $3 trillion, leaving them among the most indebted in the world. Paired with high shelter costs, the IMF warns it’s no longer just an affordability issue—it’s a broader economic threat. In its latest assessment, the agency explicitly notes, “pockets of vulnerability persist, including elevated household leverage, commercial real estate exposures, and growing nonbank intermediation.”
Housing debt isn’t isolated to a single borrower, but sits on the balance sheets across the financial system. While the IMF finds that “the financial system remains resilient to solvency and liquidity shocks,” they make it clear that risks remain. However, the financial system tolerating issues doesn’t mean those problems don’t exist.
Households with elevated leverage have limited room to absorb stress. Even without a crisis, the lofty debt loads leave the system vulnerable, potentially compounding risks. The IMF suggests this risk is now embedded in Canada’s economy, and not just confined to the borrowers who owe this debt.
Canada’s Household Debt Risk Extends Beyond Banks
Household debt isn’t just a problem for Canada’s banks, but credit needs are increasingly being met by non-bank intermediation. While non-bank lending is far from a problem by itself, the IMF sees it as an area where “pockets of vulnerability persist.” It highlights the rising lending activity outside of banks, spread across institutions with different disclosure and supervision frameworks.
The Executive Directors make it clear how this risk should be addressed: stronger data collection, stress testing, and supervisory coordination. The IMF maintains the system is resilient to solvency and liquidity shocks, but the push for better monitoring is telling.
Credit use is increasingly outside of the core banking system, providing limited regulatory oversight and visibility. It feels optimistic to simultaneously suggest a system is resilient while also warning about the lack of visibility. However, to their point—this means leverage ratios and stress tests aren’t evenly applied.
The IMF doesn’t see an immediate crisis, but it’s also hinting that it can’t see the full extent of the problem.
Heavily Indebted Households Make The Bank of Canada’s Job Harder
A subtle but important point in the IMF’s report is the influence of household debt on monetary policy. The Bank of Canada’s primary roles are inflation control and liquidity, primarily using its key interest rate to influence those measures. However, highly indebted households throw a kink in those plans.
More bluntly, the Bank of Canada can’t use its most effective tool the way it was designed to work. These households are less sensitive to rate cuts, requiring larger cuts to stimulate buying. At the same time rate hikes meant to curb credit growth, divert cash flow from consumption to paying interest.
The IMF notes that these debt loads shape how tightening or easing plays out—and by extension, limits the ability for the central bank to support the economy.
The IMF’s baseline outlook reflects this weakness, alongside external headwinds. Real GDP is projected to grow roughly 1.5%-1.6% in 2025 and 2026, with modest improvements in 2027. With inflation near target and growth below potential, the space for policy to steer the economy without unintended consequences is narrower than it would be for a less indebted country.
The IMF isn’t calling a crisis. But it is flagging household debt as a vulnerability even as it says the system can handle shocks. That’s the real issue: debt doesn’t unwind quickly, and heavily leveraged households have less room to absorb a downturn—making small shocks harder to contain.
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