Is the financial situation of Canadians worse today than in the 1980s?

For many Canadians old enough to remember, the current surge of runaway consumer price increases and escalating borrowing costs looks like a stripped down version of the 1980s.

This was the time when the country’s annual inflation rate exceeded 12% a few times and mortgage rates briefly exceeded 20%. The current inflation rate, although still very high by the standards of past decades, is only 6.9%, and mortgage rates are between 5 and 7% for qualified borrowers. .

The difference is that Canadians now have over $2.7 trillion in household debt. With so much debt, even small increases in interest rates can lead to outsized payment increases.

In some ways, borrowers are already struggling harder than they were the last time house prices and interest rates were both high. As the Bank of Canada raises its key interest rate to calm inflation, the country’s housing affordability has deteriorated beyond levels not seen since 1990, according to a measure tracked by the Royal Bank of Canada. .

Since early April, the cost of covering a mortgage, property taxes and utilities on a typical Canadian home consumed up to 60% of a typical household’s pre-tax income, RBC economist Robert Hogue wrote in the latest update of the bank’s housing affordability measure. The previous record, set in April 1990, was 57%.

According to RBC data, a homebuyer in the spring of 1990 should have taken out a $250,000 mortgage in today’s dollars if they bought a house at the national benchmark price at that time, assuming a 20% down payment and 25 years amortization.

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With a typical interest rate of 13.6% on a five-year fixed-rate mortgage, this buyer would have had a monthly mortgage payment of about $2,860, according to calculations by The Globe and Mail. This equates to 51% of the monthly median pre-tax household income at the time, or about $5,650 in today’s dollars.

In the spring of 2022, with a mortgage of approximately $700,000 (based on a benchmark home price of $872,800) and an interest rate of 3.4% (based on a weighted average of five-year fixed rates insured and uninsured mortgages), a homebuyer paid about $3,450 per month. This was 54% of the median pre-tax household income at the time, which was about $6,330 per month.

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And although house prices have fallen since the spring, rising borrowing costs have so far negated any significant gains in affordability.

The historical parallel with the 1980s and the beginning of the 1990s fuels the concern of certain finance professionals. During this period, Canada plunged into two deep recessions, followed by a prolonged slump in the housing market.

And yet, with Canada on the brink of another economic downturn, some economists say today’s borrowers can count on a financial muscle they didn’t have 30 or 40 years ago.

Large savings cushions and low unemployment mean that “the starting point for households is much better today than it was then,” said Beata Caranci, chief economist at the Toronto-Dominion Bank. .

TD estimates that Canadians have collectively accumulated $300 billion more than their usual savings in 2020 and 2021. This extra money – the product of generous pandemic benefits and reduced spending due to COVID-19 restrictions. 19 – should help households at all income levels cope with current financial pressure, Ms Caranci said.

A strong job market also helps keep households afloat financially, according to Caranci. The unemployment rate in October was 5.2%, near historic lows and well below rates seen between 1980 and 1990, when unemployment never fell below 7%, even though the labor force participation – the proportion of the adult population who were actually working or looking for a job – was lower at the time.

Savings and jobs are likely “the reason why we don’t see market capitulation and we still see a fairly resilient consumer,” Ms Caranci said.

But a better financial launch pad does not guarantee a soft landing. Economists don’t know how quickly Canadians are dipping into their pandemic savings amid persistently high inflation and rising debt payments.

Steven Ambler, an economist at the University of Quebec in Montreal, said an aggregate measure of deposits held in banks and other lenders suggests that people with bank accounts have “depleted” them.

And whether and to what extent the labor market will maintain its strength is also an open question.

“If wages stay high and household income grows faster, that could improve affordability,” Hogue said in an interview, speaking of housing.

But if wage growth stagnates, housing affordability could stagnate or deteriorate. “It’s going to make things very uncomfortable for a lot of Canadians,” he added.