Rising Rates and Rising Debt Levels May Provide Headwinds for Canadians

New data coming out this past week shows rising debt levels in Canada, with the average Canadian now owing $1.68 for every dollar of disposable income. This amounts to a new record high for Canadians, continuing a trend which has disturbed many analysts for some time now, given the fact that the Bank of Canada has just begun a rate hiking cycle.

The Canadian housing market and other interest rate sensitive industries have taken a hit in recent months, and the expectation is that this trend is likely to continue, should debt and interest rates continue to increase in lockstep in the near term.

For investors looking to navigate this environment, considering how high interest rates will be allowed to go, given the fragile nature of the global economy at this point in time, is one thing to keep in mind when thinking about whether to invest in sectors which are deemed to be sensitive to interest rates and/or consumer debt levels.

Sectors such as real estate investment trusts (REITs) have actually performed much better than many sectors over the past few months, despite widely being considered a bond proxy.

While debt service ratios remain strong in Canada, worries about how well the Canadian housing market will perform in the medium term have started to gain higher priority in the minds of many homeowners and investors alike.

I would recommend investors interested in purchasing a REIT as part of a well-diversified portfolio target one or two undervalued REITs, staying away from REITs with higher valuation multiples than their peers for the time being.


Invest wisely, my friends.