The Evolving Financial Landscape for Young Canadians
The journey to achieving key life milestones, such as homeownership, is becoming increasingly difficult for young Canadians. Rising food prices, unaffordable rental costs, and elevated housing prices have made financial stability more elusive. As of 2023, many young Canadians report feeling less hopeful about their future, with a third reconsidering plans to buy a home or move to a new rental due to the pressures of rising costs (Statistics Canada, 2023).
This article delves into how households, particularly those led by individuals under 35 years of age, are navigating the current economic environment. With a focus on evolving household balance sheets and key financial metrics, we examine how younger Canadians are adapting to these challenges and what it means for their financial resilience.
Turning Away from the Housing Market
For decades, consumer spending has driven Canada’s economic growth, but it has also increased household debt. Today, Canada holds the dubious distinction of the highest household debt-to-disposable income ratio in the G7, at 185%, far above the G7 average of 125%. A significant contributor to this debt is housing—a critical asset for wealth accumulation. However, recent trends suggest younger households are reevaluating their place in the housing market.
In the third quarter of 2023, overall mortgage balances grew by nearly $73 billion year-over-year. Yet, households with primary earners under 35 were the only age group to reduce their mortgage burdens. This may reflect decisions to avoid entering the housing market, accelerate debt repayment, or downgrade to more affordable accommodations.
During the pandemic, many young families leveraged favorable borrowing conditions to build mortgage debt. However, the landscape has since shifted, with higher borrowing costs and economic uncertainty prompting a pullback in housing-related investments.
Financial Adjustments and Debt Trends
Young households are making financial adjustments, including reducing their mortgage balances and lowering their debt-to-income ratios. This progress is largely driven by robust wage growth, with disposable income for households under 35 increasing by 2.5% in 2023 and average net savings rising by 9.2%. By the third quarter of 2023, the debt-to-income ratio for this age group had dropped to 165.2%, down from 175% in the same period of 2022, marking a notable improvement.
Despite these positive trends, the rising cost of servicing debt remains a significant challenge for younger households. Interest payments alone now account for 9.7% of their disposable income, up from 7.3% in 2022. This increase reflects both the higher initial mortgage balances typically held by younger households and the impact of rising interest rates, which have made managing debt more burdensome even as overall debt levels decline.
Housing and Wealth Creation
Housing remains a cornerstone of wealth creation in Canada. For young households, real estate accounts for 89% of total wealth, compared to 55% for the average Canadian household. However, this reliance on real estate exposes younger Canadians to significant risks during periods of market volatility.
In the past year, young households reduced the value of their real estate holdings, resulting in slower-than-average wealth growth. For many, housing remains a double-edged sword: a vital asset for building financial security but increasingly inaccessible without significant external support.
Risks to Socio-Economic Mobility
Affordability challenges, particularly for shelter, pose long-term risks to socio-economic mobility. Young Canadians, especially renters, are acutely affected by rising costs. In October 2023, 41.3% of renters reported financial difficulties, compared to 35.5% of homeowners with mortgages and 20.4% of mortgage-free homeowners (Statistics Canada, 2023).
As homeownership becomes increasingly unattainable, the ability to accumulate wealth is delayed or lost for many young Canadians. This is compounded by the growing reliance on parental financial assistance for first-time homebuyers. Between 2015 and 2021, the share of first-time buyers receiving down-payment gifts increased from 20% to nearly 30%, with the average gift value rising from $52,000 to $82,000 (Tal, 2021). For those without access to such support, the widening inequality gap threatens to cement economic disparities.
The current economic environment presents both challenges and opportunities for young Canadians. While robust wage growth and declining debt-to-income ratios are positive signs, the rising cost of living and reduced access to homeownership threaten financial stability and socio-economic mobility.
To address these challenges, policymakers and financial institutions must prioritize measures that enhance housing affordability, reduce debt burdens, and support young Canadians in achieving critical financial milestones. Without such interventions, the dream of homeownership and long-term financial resilience may slip further out of reach for a growing segment of the population.