National averages of household debt are obscuring pockets of distress, a new C.D. Howe Institute report says

Canada has the highest household debt among G7 nations, but the country is not facing a debt crisis, according to a new report from the C.D. Howe Institute think tank. However, parts of the population are struggling to pay off their debts.

Canada’s household debt service ratio (DSR), an indicator of households’ ability to pay off their debts, has dropped from its 2023 peak, according to C.D. Howe. The DSR was at 14.5 per cent in the second quarter of 2026, compared with the first quarter of 2023, when it was at 15.17 per cent, according to the latest data from Statistics Canada. The DSR measures amounts owed on principal and interest as a proportion of household disposable income.

However, younger, lower-income and highly leveraged Canadians are under pressure, C.D. Howe said.

In 2025, the top-earning fifth of households saved 34 per cent of their disposable income while those in the next quintile saved 16 per cent. However, the rest were in the red, with the lowest fifth of Canadians running a negative net savings rate — when expenditures exceed income — of 119 per cent. The middle quintile posted a negative net saving rate of -12 per cent.

“Aggregate measures obscure how sharply household financial outcomes have diverged across income groups,” the C.D. Howe report authors wrote. “The Canadian economy has exhibited a K-shaped recovery, with economic and financial outcomes diverging across income groups — a growing pattern across North America.”

Noting a stark generational divide, the report said that according to Bank of Canada figures, in late 2025, the youngest Canadian adults, aged 18 to 24, reported nearly a 50 per cent probability of missing a debt payment over the next three months. That compares with 27 per cent among Canadians aged 25 to 54 and just 0.7 per cent among those aged 55 and older.

As well, mortgage holders in pricey cities, such as Toronto and Vancouver, are highly leveraged, the report said. In Toronto, the growth of mortgage arrears has more than quadrupled from 2022 to 2025, according to a February report from the Canada Mortgage and Housing Corporation, which added that first-time pandemic buyers were most at risk.

“As long as the best-paying jobs remain concentrated in these two supply-constrained markets, new entrants will keep joining the leveraged tail, and the tail-risk problem will be structural rather than cyclical,” the authors of the C.D. Howe report wrote.

The authors recommended the government maintain the minimum qualifying rate and the loan-to-income (LTI) limits for mortgages and consider making longer-term mortgages more viable. They also noted that though increasing housing supply in Toronto and Vancouver could be a short-term solution, the government should also help mid-size cities compete for workers and companies.

Measures targeting incomes could help reduce the debt service load, too. “Policies that raise investment per worker, including competitive business taxation and the removal of internal trade barriers, would ease household debt burdens more durably than credit measures,” the authors wrote.