Posthaste: Why millennials will feel the biggest pain if the economy sours – Financial Post

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Good morning,

Canadians have been feeling the strain of higher interest rates and inflation across the nation but as a recent report from RBC points out, some more than others.

Older millennials and younger members of Generation X, who have seen their debts swell to record levels in recent years, are most vulnerable to job losses, writes RBC economist Carrie Freestone.

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Indebted Canadians between the ages of 35 and 44 had a debt-to-disposable-income ratio of 250 per cent in 2019, much heavier than the debt load they carried a decade before when it was 150 per cent, she said.

That translates into $2.50 in debt for every dollar of disposable income. And it’s a lot even by Canadian standards, which at last count had the highest household debt in the G7. The national debt-to-disposable-income ratio in the first quarter of this year was 184.5 per cent.

Younger millennials, under 35 years old, aren’t much better off with debt loads of 165 per cent of their disposable income.

“The millennial generation has in many ways been defined by its staggering high household debt,” said Freestone.

The pressure, unfortunately, is only going to get worse. The Bank of Canada has raised its interest rates from 0.25 per cent to the 22-year high of 5 per cent and may not be finished yet. Canadians with mortgages coming up for renewal in the near future could see their monthly payments rise by 25 per cent, she said.

A poll done by Angus Reid after the Bank last raised rates in July found more than a third of the people polled who had a mortgage said they were having trouble making payments.

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Almost 60 per cent expected the rate increase to have a negative impact on their finances and a third were bracing for “significant” challenges.

A big problem, Freestone says, is that though earnings have grown rapidly, they have not grown enough to absorb the higher debt payments.

“Since the beginning of the pandemic, average hourly earnings have risen 12 per cent, less than half the increase of the average five-year fixed mortgage payment,” she said.

Baby boomers, on the other hand, are in much better shape.

Only 14 per cent of Canadians aged 65 and older still hold a mortgage and if they do it’s half the size of a millennial mortgage, she said.

Baby boomers and older members of Generation X, people 55 and older, have also built up a larger share of assets that benefit from higher interest rates. Canadians’ personal term deposits in banks have risen $200 billion above pre-pandemic levels, mainly on the attraction of higher interest rates, Freestone said.

Older Canadians too are less dependent on income. For Canadians aged 65 and older two thirds of income comes from private pensions and government benefits, while younger age groups get 85 per cent of their income from their jobs.

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And boomers on average spend less than younger generations. Freestone says the older age group spends a third less on discretionary goods and services than Canadians in their thirties.

So far millennials’ spending has held up despite the challenges of higher interest rates and high inflation, she said. But if layoffs rise it could “significantly derail discretionary spending.”

“While growth is still holding up even after record rate hikes, higher unemployment rates may trigger an entirely different outcome for demand in the year ahead,” she said.

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Coming up for mortgage renewal? You might want to have a look at today’s chart. A record 95 per cent of new mortgages were fixed-rate in June, compared with 43 per cent when the Bank of Canada began hiking rates in March 2022, says National Bank economist Daren King.

Since then the Bank has raised its benchmark interest rate by 4.75 percentage points, and borrowers now looking to renew will see a steep climb in payments.

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The fixed rate majority might seem a bit puzzling considering the Bank is nearing, if not at, the end of its hiking cycle, said King.

“Does this mean that households are locking in at potential rate peak for the long term? Not so fast,” wrote King.

Most of those borrowers, 55 per cent, signed up for three to four-year terms, rather than the traditional five-year.

“There is reason to believe that they opted for this option because it is more favourable than the shorter term options (1 to 2 years) which reduces the payment and eases qualification,” King said. “However, they don’t want to miss out on possible rate reductions down the road.”

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Investing returns have often topped inflation, but it gets more difficult to do as prices rise. Portfolio manager John De Goey says he’s concerned the current decent returns for interest-bearing vehicles, as well as high equity valuations, high debt levels and a dangerously inverted yield curve, mean investors should tread lightly. Find out more

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Today’s Posthaste was written by Pamela Heaven, @pamheaven, with additional reporting from The Canadian Press, Thomson Reuters and Bloomberg.

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