Household finances in Canada are shifting in a way that could have broad economic consequences. Recent data shows Canadians are relying more on their savings to fund spending, raising questions about long-term financial stability and the outlook for housing markets.Canadians are spending more, but they are doing so by tapping into their savings rather than earning more. In the second quarter of 2025, the household savings rate fell below 5%, the lowest level in years and the third straight quarterly decline. This means households are relying less on income growth and more on reducing their financial buffers to sustain consumption.This shift carries important implications. While consumer spending has supported economic growth in recent months, it comes at the cost of reduced savings and increased vulnerability to financial shocks. For households carrying high debt loads, the combination of weaker income growth and rising interest costs is intensifying financial pressure. For the housing market, these trends matter because they affect both the ability of households to afford homeownership and the resilience of housing demand in a more fragile economic environment.Context of the Decline in the Household Savings RateThe drop in savings was a key driver behind a notable increase in consumer spending during Q2. Household consumption expenditures rose at a 4.5% annualized rate, supporting a 3.5% annualized growth in final domestic demand. This strength in consumption was not matched by growth in income; employee compensation recorded its weakest quarterly increase outside of the pandemic period since 2016. This suggests underlying softness in the labour market and highlights that the boost in spending came primarily through reduced savings rather than increased earnings.Relationship Between Savings Decline and Real Estate MarketsThe decline in savings, combined with sluggish income growth and elevated household indebtedness, has implications for both consumer resilience and housing market stability.Debt Service Pressure and Capped SpendingThe household debt service ratio, or the proportion of disposable income devoted to debt payments, rose to 14.4% in Q2, marking the first increase in six quarters and reaching near 15-year highs. This trend indicates that more household income is being channelled toward interest payments, reducing discretionary spending. A September Edge Realty Analytics report suggests this dynamic is likely to limit consumer spending for the remainder of the year, which could dampen economic growth and constrain recovery in the real estate sector.Rising Insolvencies and Financial StressConsumer insolvencies rose by 4.6% year-over-year in July, with British Columbia and Ontario showing particularly high increases of 9.6% and 8.8%, respectively. The total liabilities reported in these filings rose by 21% year-over-year, suggesting that insolvencies involve larger debts and more financially stressed households. Homeowners, in particular, are likely to account for much of this trend, given the higher debt loads they carry.While data from the Bank of Canada indicates households generally managed debt in traditional consumer and mortgage credit markets during Q2, signs of strain are apparent in alternative lending markets such as mortgage investment corporations (MICs). In the Greater Toronto Area (GTA), the number of power of sale listings is rising, with 80% initiated by private or institutional lenders, indicating stress in segments of the housing market where lending terms are tighter and defaults occur more quickly.Real Estate Exposure and VulnerabilityDespite household net worth reaching record highs in Q2, largely driven by gains in public equity markets, real estate remains a dominant portion of household wealth. Real estate assets now represent the equivalent of 275% of Canada’s GDP, roughly 100 percentage points higher than comparable levels in the United States. This concentration leaves households significantly exposed to potential declines in housing values. Should the housing market experience a sharper downturn, the broader household sector could face heightened financial stress, particularly given already stretched savings rates and elevated debt levels.