Canadians and debt
Canadians are clearly getting the message and curbing their appetite for debt, growing richer at the same time.
After years of admonishment from the Bank of Canada and the federal government, a key measure of family finances has levelled off.
The measure of household credit market debt to disposable income remains at a worrisome level, 163.97 per cent, Statistics Canada said today.
But that fourth-quarter reading is down from 164.2 in the previous three-month period, having climbed fairly steadily for decades.
Another measure, the debt service ratio, was just about flat at some 7 per cent. That measure, household debt interest divided by disposable income, is at just about a record low.
At the same time, the net worth among Canadian households increased by 3 per cent in the fourth quarter of last year, or $227-billion, as equities surged 5.9 per cent in a strong market.
Also playing into that was a 1.6-per-cent rise in property values, the federal agency said.
Household net worth now stands at a record $7.7-trillion, as does per-capita net worth of more than $218,000, according to Royal Bank of Canada, which calculates the latter in a slightly different way than does the federal agency. Net worth as a percentage of disposable income also rose, to 714.8.
“Leverage, as measured by household credit market debt to disposable income, appears to be stabilizing,” said senior economist Sonya Gulati of Toronto-Dominion Bank.
“The pace of mortgage and credit debt accumulation has noticeably slowed versus the decade-long average,” she added.
“The debt service ratio also continues to fall. All three developments seem to indicate that the average Canadian is heeding the message that low interest rates will not be around forever. However, stretched household balance sheets continue to be an important, domestic economic risk that needs monitoring, particularly as interest rates return to more equilibrium levels.”
The debt-to-income ratio has been the source of angst in Canada amid a hot real estate market and fears over the vulnerability of some families when interest rates inevitably rise, though that’s some time off.
Finance Minister Jim Flaherty moved in mid-2012, with mortgage insurance restrictions, to cool things down, while the previous Bank of Canada governor, Mark Carney, warned consumers to the point of threatening to hike interest rates.
The central bank believes, however, as do others, that personal finances are coming into line and that the housing market is headed for a soft landing.
There has been a notable slowdown in credit growth recently after Canadians gorged on cheap money in the post-crisis era of still ultra-low interest rates.
And observers believe it will continue to slow.
“Canadian households accumulated debt at the slowest year-over-year rate in Q4/13 since 2001, confirming timelier data from the Bank of Canada that a moderation in credit growth is firmly under way,” said RBC’s economist Laura Cooper.
“Moreover, a greater expansion of asset values accompanied the rise in households’ debt burdens, thereby helping to ease what the Bank of Canada referred to in its latest interest rate announcement as the ‘risks associated with elevated household imbalances.’”
That doesn’t mean credit isn’t expanding, only that its growth is slowing, having outpaced the gains in incomes to pump up the debt-to-income ratio. And it’s an issue of moderation.
According to Statistics Canada, mortgage debt climbed 1.1 per cent in the fourth quarter to $1.1-trillion, while other consumer credit rose 0.5 per cent to $508-billion.
“Household demand for funds has moderated over the past six years,” said the federal agency.
“The average quarterly growth in mortgage debt in this period was 1.8 per cent, while that of consumer credit was 1.3 per cent,” it said.
“In contrast, the average quarterly growth in mortgage debt and consumer credit debt were both higher at 2.5 per cent each from 2002 to 2007.”