The Bank of Canada is flagging the steady climb of household debt and still-hot housing markets as the financial system’s top vulnerabilities. (Photo by THE CANADIAN PRESS)

Debt-to-household-income ratio rises in third quarter, household net worth

OTTAWA — Sky-high debt loads are one of the central bank governor’s top concerns, he said Thursday after data showed the amount Canadians owe relative to their income hit a new high in the third quarter.

Statistics Canada reported that household credit market debt as a proportion of household disposable income increased to 171.1 per cent, up from 170.1 per cent in the second quarter. That means there was $1.71 in credit market debt, which includes consumer credit and mortgage and non-mortgage loans, for every dollar of household disposable income.

Bank of Canada governor Stephen Poloz said in a speech in Toronto that high debt levels are one of the things that keeps him awake at night because they make the economy as a whole more sensitive to higher interest rates than in the past.

“These vulnerabilities are elevated, and are likely to remain so for a long time,” he said.

“Remember, it took years for these vulnerabilities to build up in the first place.”

The central bank has raised interest rates twice this year due to the strong economy. Since the second increase in September, it has held the rate steady signalling it will proceed with caution.

Benjamin Reitzes, Canadian rates and macro strategist at the Bank of Montreal, said the upward trend in household debt continues unabated.

“And, with homebuyers rushing to get into the market ahead of the new OSFI rule change that takes effect on Jan. 1, 2018, we could see a further increase in Q4,” Reitzes wrote in a report.

“However, that suggests we could see some flattening out of the ratio in 2018 — though don’t bet on it as housing has been persistently resilient.”

Household debt is often cited as a key risk to the Canadian economy by the Bank of Canada and others.

In a report last month, the OECD said high house prices and associated debt levels remain a substantial financial vulnerability in Canada.

“A disorderly correction would adversely impact growth and could threaten financial stability,” the organization said.

Statistics Canada said the household debt service ratio, measured as total obligated payments of principal and interest as a proportion of household disposable income, was relatively flat at 13.9 per cent, while the interest-only debt service ratio was 6.3 per cent, down from 6.4 per cent in the previous quarter.

The Bank of Canada has raised its key interest rate target twice this year, moves that have led to increases in the prime rates at the country’s big banks used to set loans like variable-rate mortgages.

Royal Bank economist Josh Nye noted the debt service ratio will increase as the Bank of Canada continues to gradually raise interest rates.

“However, the prevalence of fixed rate mortgage debt means households won’t feel the increase all at once,” Nye wrote.

“Rather, as today’s data showed, the debt service ratio is likely to rise only gradually.”

Total household credit market debt grew to $2.11 trillion in the third quarter, up 1.4 per cent from the previous quarter. The increase came as mortgage debt increased 1.5 per cent to $1.38 trillion, while consumer credit rose 1.2 per cent to $620.7 billion.

Meanwhile, the total net worth of the household sector edged down 0.1 per cent to $10.61 trillion in the third quarter.

The move lower was due to a drop in home values as housing resale prices weakened. The value of household financial assets edged up 0.1 per cent.

Get local stories you won't find anywhere else right to your inbox.
Sign up here

Just Posted

Trudeau reinstates COVID-19 updates as pandemic’s second wave worsens

Trudeau to join Canada’s top public health officers today

Queen Elizabeth II to trim costs as COVID-19 hits income

Royal household will not ask for more government money

Legislation to set five-year climate targets highest priority this fall: Wilkinson

Canada needs to curb its emissions drastically over three decades

‘Ambulance dispatch should be kept local,’ says Red Deer mayor

Four Alberta mayors meet with Minister of Health on Thursday

Central zone down to 19 active COVID-19 cases on Thursday

Provincially, 158 new COVID-19 cases were identified

Liberals vow wage-subsidy extension to 2021, revamp of EI system in throne speech

Canadian labour market was hammered by pandemic, when lockdowns in the spring led to a loss of 3 million jobs

Davis, Lakers beat Nuggets to take 3-1 lead in West finals

Davis, Lakers beat Nuggets to take 3-1 lead in West finals

Heat get chance Friday to oust Celtics, reach NBA Finals

Heat get chance Friday to oust Celtics, reach NBA Finals

Russian Olympic biathlon champion loses Sochi doping case

Russian Olympic biathlon champion loses Sochi doping case

Raptors coach Nurse says he needs to ‘decompress’ from this season

Raptors coach Nurse says he needs to ‘decompress’ from this season

Canadian rookie receiver Claypool is impressing early with Pittsburgh Steelers

Canadian rookie receiver Claypool is impressing early with Pittsburgh Steelers

Iditarod preps for any scenario as 2021 race plans proceed

Iditarod preps for any scenario as 2021 race plans proceed

Pac-12 to kick off 7-game football season in early November

Pac-12 to kick off 7-game football season in early November

Penguins trade 2-time Cup winner Hornqvist to Panthers

Penguins trade 2-time Cup winner Hornqvist to Panthers

Most Read