Canada has the highest level of household debt in the G7, making its economy vulnerable to a global economic crisis, according to the country's housing agency.

In an analysis published Tuesday, Canada Mortgage and Housing Corp. deputy chief economist Aled ab Iorwerth said that the country's household debt has been rising "inexorably" due to rising home prices. 

Mortgages currently make up about three-quarters of household debt in Canada. While household debt made up 80 per cent of the size of the overall Canadian economy during the 2008 recession, it rose to 95 per cent in 2010 and exceeded its size in 2021, he noted.

"By contrast, household debt in the U.S. fell from 100 per cent of GDP in 2008 to about 75 per cent in 2021," wrote ab Iorwerth. 

"While U.S. households reduced debt, Canadians increased theirs and this will likely continue to increase unless we address affordability in the housing market."

Over the same period of time, household debt also dropped in the U.K. and Germany and was nearly unchanged in Italy.

While ab Iorewerth said not all debt is bad, high levels of debt can do significant damage when a recession or other negative economic event happens and leads to widespread job losses — making it difficult, if not impossible, for many mortgage holders to pay back their debt.

While an upcoming CMHC report is expected to contain more information about how Canadians are coping with this year's higher interest rates, ab Iorewerth said the agency already sees "early warning signs" that more and more consumers are getting into financial trouble.

"When many households in an economy are heavily indebted, the situation can quickly deteriorate, such as what was witnessed in the U.S. in 2007 and 2008," he wrote.

"Canada is safeguarded by a sound institutional framework and prudent financial regulation. This ensures that most Canadian borrowers would be able to withstand currently elevated mortgage rates. But, in the event of a severe global economic downturn, Canada’s high household debt will be a vulnerability."

One way to reduce the risk, according to the CMHC, is to improve housing affordability in Canada — either through increasing housing supply or renovating and rebuilding the country's rental stock to be modern and attractive in order to prevent Canadians from feeling compelled to be homeowners.

A recent report from RBC Economics stated a looming recession and an unemployment rate projected to climb to 6.6 per cent by early 2024 are set to tip more Canadians into loan delinquencies and insolvencies.

The report stated with pandemic-related government support measures largely over and living costs now soaring, mortgage delinquencies could rise by more than a third of current levels over the coming year. 

Consumer insolvencies could increase almost 30 per cent over the next three years, returning to pre-pandemic levels and likely remaining on an upward trajectory after that, RBC suggested.

This report by The Canadian Press was first published May 23, 2023.