Canadians’s debt to income ratio improves

TORONTO — Canadians racked up more debt in the final quarter of 2011, but the key debt-to-income ratio that officials have been warning about fell from record highs thanks to rising income levels.

TORONTO — Canadians racked up more debt in the final quarter of 2011, but the key debt-to-income ratio that officials have been warning about fell from record highs thanks to rising income levels.

Statistics Canada reported Thursday that household credit market debt, which includes credit cards, mortgages and loans, rose in the fourth quarter, even as borrowing slowed.

The Bank of Canada and the federal government, among others, have warned repeatedly that Canadians are taking on too much debt, lured by the super-low interest rates.

Credit market debt-to-personal disposable income also backed off to 150.6 per cent from 151.9 per cent during the quarter. That means Canadians now owe $150.60 for every $100 in disposable income.

“At 150.6 per cent, household indebtedness remains excessive,” said TD economist Diana Petramala.

“And, the ratio is likely to climb further in the quarters ahead as the combination of soft labour markets and expected modest economic growth suggest the sharp gain in personal disposable income at the end of 2011 was unsustainable.”

The problem for central bank governor Mark Carney — one of the most active voices on the potential debt crisis — is that the Canadian and global economies are in too fragile a state for policy-makers to clamp down on rates, leading many to suspect they will remain low well into next year.

Carney has admitted that keeping rates low will foster a continued rise in household debt from historic highs in the third quarter. That’s because low interest rates encourage consumer spending and help to spur borrowing and buying activity in the Canadian housing market.

“More household debt accumulation now, will only come at the expense of less household spending and overall economic activity later down the road as interest rates return to more normal levels,” Petramala said.

The decline in the debt-to-income ratio is a positive trend, but it doesn’t necessarily mean Canadians are heeding warnings about taking on too much debt. Instead, they continued to spend during the fourth-quarter, while incomes and investment values rose.

Household net worth was up almost one per cent to $182,100 from $180,600 in the prior quarter, as a result of higher values of equities, mutual funds and pension assets, Statistics Canada said.

Housing prices also continue to rise, making that key asset even more valuable.

The fourth-quarter data suggests Canadian debt burdens continue to grow, “fuelling what the Bank of Canada referred to as Canada’s ’biggest domestic risk’,” noted RBC assistant chief economist Dawn Desjardins.

“For now the rise in asset values and low interest rates are insulating households from any negative fall out from the elevated debt levels.”

Meanwhile, the country’s national net worth — which represents the total wealth of the country less what is owed to non-residents — rose 0.8 per cent to $6.6 trillion in the fourth quarter, as business balance sheets improved.

Business net worth grew for the third straight month, bolstered by a 2.4 per cent increase in machinery and equipment. Meanwhile, business borrowing grew by 1.4 per cent as confidence about making investments improved along with a rise in recent positive economic indicators.

“Improving business balance sheets spell good news for future economic growth, as it is likely to encourage Canadian businesses to increase spending on investment and hiring,” said Petramala.

However, Petramala pointed out that business net worth still hovers 29 per cent below 2009 peak levels.

Meanwhile, the government’s debt situation remained relatively stable compared to the prior quarter.

Total government net debt at book value increased to $812 billion in the fourth quarter from $794 billion in the third quarter, representing 47.3 per cent of the gross domestic product, up from 46.8 per cent in the third quarter.

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