Canada’s incredibly-indebted private non-financial sector remains its biggest point of vulnerability. With long-term rates ratcheting higher and the burden on mortgage holders continuing to increase, debt service ratios are set to climb well above records set just before the pandemic. We think this will reduce consumer spending power and business investment at a time when real income growth is fading and lending conditions are tightening. A recent recovery in real estate values is likely to pull new listings into the market, just as rising carrying costs cool demand. This should limit further price appreciation and reduce the likelihood of a “melt-up” in housing activity that leads to overheating in the wider economy.

Private sector debt service ratio, %