OTTAWA – Household debt in Canada hit a new all-time high in the just completed third quarter, but the tiny increase from the previous quarter suggests Canadians are reaching their limit on borrowing.
Debt to disposable household annual income rose a slim 0.6 percentage points to 163.7 per cent over the summer months, a time when Canadians were getting back into the housing market in a big way.
The increase means Canadians owe nearly $1.64 for every $1 in disposable income they earn in a year.
But analysts took comfort in the fact that the gain was the smallest third-quarter growth rate in 12 years, and that follows the smallest gain in a decade the previous quarter.
“Those figures should be encouraging for policy makers and suggest that the Bank of Canada’s belief that imbalances are evolving constructively is right on the mark,” said Benjamin Reitzes, a senior economist with BMO Capital Markets.
“Policy makers will continue to watch this metric, but rising interest rates and better income growth should stabilize, then nudge this ratio lower over the next few years.”
Speaking in Montreal on Thursday, central bank governor Stephen Poloz called household debt a major risk to the Canadian economy, suggesting the fear of stoking more borrowing as one reason he has not been even more dovish on interest rate policy.
“Growth in household borrowing has moderated and residential investment is on a more sustainable track,” Poloz assured the business audience, adding, however, that “nonetheless, the risks around this base case need to be managed.”
Policymakers are fixated on the debt ratio in part because it was at above 160 per cent that households in the United States and Britain ran into trouble about five years ago, contributing to defaults and the financial crisis that triggered the 2008-09 recession.
They also fear that at such elevated levels, many Canadian households would be unable to withstand a financial shock such as a loss of income, or a sudden spike in interest rates that raised debt services charges. That could lead to a sharp correction in home prices, as well as households pulling back on spending in other areas, thereby impacting the economy generally.
RBC economist Laura Cooper said in a note to clients that the most likely scenario is that as housing moderates, the pace of household debt accumulation will also ease.
“This would allow policymakers to focus their efforts on absorbing the still elevated excess capacity in the economy,” she said, adding that she expects the central bank will keep its trendsetting policy interest rate at one per cent until mid-2015.
A sizable $19.7 billion of borrowing on mortgages contributed the lion’s share to the $25.1 billion total household borrowing during the third quarter, which runs July-to-September. Total mortgage debt at the end of the third quarter stood at just over $1.1 trillion, up 1.8 per cent from the second quarter.
Consumer credit debt totalled $505 billion at the end of the quarter, up one per cent from the previous three-month period.
Despite the increase in debt, households continued to get richer in the third quarter as their net worth gained 2.2 per cent on the back of a strong stock market.
The value of shares and other equities gained 3.7 per cent in the quarter, while the value of household real estate gained 1.5 per cent.
On a per capita basis, Canadian net worth increased to $212,200, also an all-time high, from $208,300 in the second quarter.
On the government front, net debt edged to a nine-year high of 51 per cent of gross domestic product. By comparison, net government debt peaked at 93 per cent in 1996.