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Canada’s Millennials are doing worse than previous generations by virtually every metric. RBC Economics shared a report focusing on debt, labor, and economic risks. They found that Millennial incomes are failing to keep up in the current environment, leading to less disposable income. Boomers are doing much better, so it may sound like it all washes out at a high level. However, the shift in consumption can amplify the shock of any economic downturn.
Millennials Are Carrying More Debt Than Previous Generations
Canadian Millennials are much more indebted than previous generations, according to RBC. Older Millennials and younger Gen Xers (between 35 and 44 years old) had a debt-to-income ratio of 250% in 2019. The bank highlights this is a whopping 100 points higher than the 150% the same age group carried 20 years ago.
As for younger Millennials (under 35), a shift in the type of debt is the primary concern. This demographic has a debt-to-income ratio of 165% in 2019, moving little since 1999. However, the bank emphasizes the homeowner rate is much lower today, finding just 30% have a mortgage. The takeaway here isn’t just that incomes are failing to keep up.
Source: RBC Economics.
Most household debt in Canada is outstanding mortgage credit. Fewer Millennials are carrying so much more debt that it’s able to drive the whole average higher. The households unable to purchase a home tend to have significantly lower debt levels, actually bringing this average down. To put it bluntly, the picture is even more bleak as you drill further down into the issue.
Millennial Incomes Are Failing To Keep Up
Only a minority of Millennials have a mortgage, but are vulnerable to rate hikes. The bank warns they could see monthly payments rise 25%, further eroding cash flow. Large debt loads, rising rates, and slow income growth are a less-than-ideal combination of factors.
“Not all millennials have mortgages,” explains Carrie Freestone, the RBC economist in charge of the report. “But for those that do, the impact on payments will be much more dramatic. This is especially the case for younger cohorts with higher remaining principals— particularly since earnings haven’t kept up with the pace of debt accumulation. Since the beginning of the pandemic, average hourly earnings have risen 12%, less than half the increase of the average five-year fixed mortgage payment.”
A Boom For Boomers, Not So Much For Millennials
The Boomer demographic is doing much better, according to Freestone’s research. Representing nearly a quarter of tax filers and 20% of household income, just 14% of households still have mortgage debt. For those who do, the bank found the average balance is nearly half the size being carried by Millennials.
Boomers and older Gen Xers are also benefiting from higher rates, explains the bank. The combined demographic has amassed a significant basket of interest-earning assets. That means while the higher rate environment may pullback some home equity wealth, it isn’t exactly placing them in peril.
“Canadians’ personal term deposits in chartered banks have risen $200 billion above pre-pandemic levels, largely due to the lure of higher interest rates,” says Freestone.
The Disposable Income Shift Can Amplify An Economic Downturn
Zooming out, one might expect the contribution to the economy to level out. Millennials face reduced disposable income due to high shelter costs, but Boomers are seeing a boost. Unfortunately, the spending dynamics for the economy are less favorable with this shift.
“Despite these advantages, boomers’ consumption levels are the lowest on average. This group is spending over a third less on discretionary goods and services than younger Canadians in their thirties,” she says.
“And given younger cohorts’ heavy reliance on a stable employment income (which accounts for 85% of their total income) to service high debt levels, layoffs could significantly derail discretionary spending.”
On paper, it all shakes out in the end to policymakers. A dollar of disposable income is just a dollar of disposable income to most in Ottawa. Similar to how they just see a dollar of GDP as a dollar of GDP, they’re missing the bigger picture. The change in composition will amplify the economy’s vulnerability.
“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,” says Freestone.
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