Household Debt Climbs to Record Levels, Driven Partly by Hot Real Estate Markets

Sunday Sep 18th, 2016



The amount Canadians owe compared with how much they earn hit a new record in the second quarter, driven in part by the country's hot housing markets.

TD Bank senior economist Leslie Preston said low interest rates have made borrowing more attractive, especially for homebuyers, and predicted the debt ratio could continue to trend a little higher in the next few quarters. 

"We think there's still a fair bit of momentum in Toronto's housing market and Toronto is just a huge share of Canada's overall housing market that we do think this ratio could tick up," she said.

The ratio of household credit market debt to disposable income climbed to 167.6% in the second quarter compared with 165.2% in the first quarter. The increase means households owe about $1.68 in credit market debt for every dollar of disposable income.

The growth came as household credit market debt climbed 2%, while disposable income increased 0.5% in the quarter.

BMO Capital Markets senior economist Benjamin Reitzes said the increase in the debt ratio was consistent with a usual seasonal trend - with the second quarter the strongest period for housing markets and thus mortgage debt growth.

"While it looks as though the Vancouver housing market is cooling after the foreign buyers' tax was implemented, the Toronto market remains very strong, and the others are showing signs of improving as well," Reitzes said.

The Bank of Canada has identified household debt as a key risk to the economy.

In its latest interest rate announcement, the central bank said "financial vulnerabilities associated with household imbalances remain elevated and continue to rise."

Scott Hannah, chief executive of the Credit Counselling Society, said when interest rates are low it's tempting to buy things on credit, but interest rates will rise eventually.

"If we're already struggling to manage our debts now, things are only going to get more challenging when the cost of borrowing rises," Hannah said.

A recent report by credit reporting agency TransUnion suggested up to one million Canadian borrowers, including some of the highest rated consumers, could face problems paying their debts if interest rates rise. 

TransUnion said that while the majority of Canadians will not be materially impacted in the near term by an interest rate increase, there is a "material subset."

Total household credit market debt - which includes consumer credit, and mortgage and non-mortgage loans - was $1.973 trillion at the end of the second quarter, including $585.8-billion in consumer credit and $1.293 trillion in mortgage debt. 

Reitzes noted that Canadian household debt rose above 100% of nominal gross domestic product for the first time. 

Total household net worth increased by 1.9% in the second quarter to $9.84 trillion, boosted by a gain in real estate. Household net worth on a per capita basis was $271,300.

The ratio of household debt to assets was 16.9%, relatively unchaged from the previous quarter, suggesting Canadian households had $5.92 of assets for every dollar of debt. 

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