Household debt hits new record

Bank of Canada governor Mark Carney has named rising household debt a key risk to the Canadian economy, but noted this week he was encouraged that credit growth appeared to be slowing.

Still, Carney has also said he expects the debt-to-income ratio to keep rising over the next couple of years. That is in part because of a lag in time between purchase decisions — such as a new home — and when the debt gets registered.

In the July-September period, households borrowed $27.3 billion, $18.4 billion of that in mortgages, while consumer credit levels increased by $7 billion to $474 billion.

The high debt-to-income number may surprise Canadians who only a few months ago were told it was just above 150%. But Statistics Canada has recently revised how it calculates the measure to make it more representative of actual household finances.

There was some good news in the report. The agency noted that the pace of growth in debt slowed during the period.

As well, household net worth rose one per cent to $197,800 in the July-September period, mostly due to gains in holdings in stocks, including mutual funds, and increased value of pension assets.

Economist Jimmy Jean of Desjardins Capital Markets said the report is unlikely to change the perception of Canada’s debt problem.

The debt-to-income ratio has been setting new records since 2003, but remains below the peak reached south of the border before the 2007 housing crash. StatsCan says using equivalent measurements, Canada’s ratio is about 10 percentage points below the peak reached in the U.S. prior to the housing crash in 2007.

The Bank of Canada, Jean notes, shouldn’t be shifted from its interest rate stance given “the evolution of debt seems to tie in to its expectations.” He pointed out that the effect of mortgage tightening rules brought in July had only begun to be felt in the third quarter numbers.

But while managing debt doesn’t appear to be a major concern at the moment, thanks to super-low interest rates, the danger signs continue to flash red, economists warned.

“The high level of debt leaves households more vulnerable to a rise in interest rates than they have been in the past,” said TD Bank economist Diana Petramala.

“Given the prospects that interest rates will eventually rise, households must cool their spending and borrowing further.”

On a national accounting level, Canada’s net worth increased by more than $9 billion in the third quarter to $6.8 trillion. That translates to $194,100 per person.

However, an increase in net foreign indebtedness dampened the gain, the agency said.

This higher net foreign debt was largely a result of increased Canadian borrowing abroad, as well as a decrease in the value of Canadian investments denominated in foreign currency because of the rising value of the loonie.