Debt ratio might have passed its peak already, observers say
The ratio of Canadian household debt relative to income fell slightly in the 4th quarter of last year, raising speculation that the growth in debt may have turned a corner.
Statistics Canada said late last week that household credit market debt as a proportion of household disposable income stood at 170.4% in Q4 2017.
That compared with 170.5% in the previous quarter, which was revised down from an earlier reading of 171.1%.
“While it’s too early to tell, we just might have seen the peak in the debt ratio in Q3, as Q1 will no doubt see a sizable decline due to seasonality,” the Bank of Montreal’s Canadian rates and macro strategist Benjamin Reitzes told The Canadian Press.
Household debt is often cited as a key risk to the Canadian economy by the Bank of Canada and other observers. The central bank, which has raised its benchmark interest three times since last summer, has said it is carefully monitoring the economy’s sensitivity to higher interest rates.
Statistics Canada reported the key ratio crept lower as total household credit market debt – which includes consumer credit, mortgage, and non-mortgage loans – increased 1.1% in the fourth quarter to $2.13 trillion. Mortgage debt totalled $1.397 trillion, while consumer credit rose to $630.4 billion.
Read more: Fiscal watchdogs caution about Canada’s untrammelled borrowing spree
Meanwhile, the total household debt service ratio, measured as total obligated payments of principal and interest as a proportion of household disposable income for both mortgage and non-mortgage debt, remained flat at 13.8% in the fourth quarter.
“With interest rates expected to rise further and housing regulations tightening at the federal and provincial level, the peak in debt growth could very well be behind us,” Royal Bank economist Josh Nye wrote in a recent report. “That should be viewed as a positive development by the Bank of Canada, though progress on reducing the ‘key vulnerability’ of elevated household debt will likely be very slow.”
The drop in the key debt ratio came as the net worth of the household sector increased 2.1% in the fourth quarter to nearly $10.9 trillion.
Statistics Canada said financial assets were the main contributor, growing by $196.6 billion to nearly $6.9 trillion, led by equity and investment funds.
The value of household residential real estate increased by 0.6% in the fourth quarter, after remaining flat in the previous two quarters.
