Financial distress unveiled: two decades of Canadian household dynamics

This study analyzes household financial distress in Canada using five iterations of Statistics Canada’s Survey of Financial Security (SFS) datasets from 1999 to 2019. Focusing on household solvency and liquidity, and utilizing seven important indicators, we construct a unique Financial Distress Index (FDI) using Polychoric Principal Component Analysis (PPCA). Our findings reveal that younger generations and households with less education have consistently experienced higher levels of financial stress than older generations and individuals with higher education, respectively. Our quantitative analysis of both cross-section and pooled data, using a fractional probit model suggests that age, gender, education of household head, region of residence, sources and levels of income, liquid assets, high-cost loans, and debt-to-income ratio play crucial roles in determining financial distress. For instance, in 2019, households earning $100,000 or more have experienced 7% less distress than those earning below $20,000. At the same time, households with mortgages of $500,000 or more are likely to have faced 16% higher financial distress compared to their reference category (zero mortgage), due to larger payments and increased financial pressure. The results emphasize targeted policy interventions to alleviate distress and promote financial stability among Canadian households.