Canadian households are once again piling on debt faster than their incomes can keep up. Statistics Canada (Stat Can) data shows the household debt-to-income ratio rose in Q1 2025, eroding some of the progress made in previous quarters. While rate cuts initially offered relief, they’ve begun to backfire—fueling borrowing and increasing household vulnerability to economic shocks.
About Today’s Data: Household Debt-To-Income Ratio
The household debt-to-income ratio measures how much debt is owed relative to after-tax income. For example, a ratio of 180% means the average household owes $1.80 for every $1.00 earned—an indicator of financial vulnerability, especially during rate hikes, job losses, or downturns. While 180% may not seem like much, note that this is an average and many households carry little or no debt. That means the problem is more concentrated than it appears.
Falling ratios indicate households are deleveraging or seeing income outpace debt—both signs of improving stability. Rising ratios signal the opposite: debt is growing faster than income, increasing vulnerability.
A ratio below 100% is considered ideal, providing strong protection against economic shocks. Between 100% and 150% is elevated risk but generally manageable. Above 150% is high risk, with households effectively treading water.
Canadian Household Borrowing Back To Rising Faster Than Income
Canadian household debt-to-income ratio.
Source: Statistics Canada; Better Dwelling.
Canadian households have seen some improvements but things are starting to erode. The ratio climbed 0.4 points to 173.9% in Q1 2025, marking the second consecutive increase. The ratio is now the highest since Q2 2024, though it remains 4.4 points lower than a year ago. Households are better off than this time last year, but the recent quarters reveal an important caveat.
Low Rates Provided Temporary Relief, But Make The Issue Worse
Lowering rates provides temporary relief by allowing a higher share of payments to go to principal. When this easing cycle kicked off in 2024, the ratio plunged in Q2 (-3.4 points) and Q4 (-2.8 points). But low rates provide more leverage and incentivize borrowing, helping to boost debt levels—a problem that emerges in Q4 2024 and continuing into Q1 2025.
Raising rates brings short-term pain by reducing the share of payments going to principal, but it also reins in excess credit consumption. The ratio hit a record high in Q2 2022, when the tightening cycle began, then declined steadily until rate cuts resumed in 2024. However, higher rates remain unpopular—especially among policymakers overseeing ballooning national debt.
Low rates offered temporary relief, but that benefit is already fading. The ratio is climbing again, and while further cuts may offer some short-term relief, history shows this strategy often backfires—leaving households, and the broader economy, in a more precarious situation.
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