Canadians less indebted as rebounding equity, property prices bolster net wealth
Canadian household debt eased in the three months to August for the third consecutive quarter as higher incomes more than offset increased borrowing because of low interest rates, according to Statistics Canada.
Household credit market debt as a proportion of household disposable income fell to 177.1 per cent, showing there was $1.77 in credit market debt for every dollar of household disposable income, the government figures stated.
The ratio is down from a high of 178.3 per cent last year. However, the portion of disposable income that households must put towards interest and principal payments for mortgages and other borrowing rose to 14.9 per cent, its highest ever, the data showed.
The decrease is largely in line with Bank of Canada’s assessment. In May, the Bank noted that the mortgage stress tests introduced last year have improved the quality of new mortgage lending.
“As a result, the share of new mortgages going to highly indebted households — those that owe more than 450 per cent of their income — has declined significantly. Also, the number of Canadians falling behind on their debt payments remains low,” the bank said in its report. “The combination of the revised mortgage guidelines and past increases in interest rates have helped to slow the pace of household borrowing and stabilize the overall household debt-to-income ratio in Canada.”
Toronto Stock Exchange index is up 16.20 per cent this year and was flirting with new highs Friday. National house prices increased from a year ago by the smallest amount in a decade. The Teranet–National Bank National Composite House Price Index rose by 0.4 per cent in July compared with the same month in 2018, its lowest uptick since 2009.
“Household credit burdens will remain a key headwind to the Canadian economy for some time,” Priscilla Thiagmoorthy, an economic analyst at BMO Capital Markets in Toronto, said in a research note.
Household credit burdens will remain a key headwind to the Canadian economy for some time
Priscilla Thiagmoorthy, an economic analyst at BMO Capital Markets
Likewise, Robert Hogue, senior economist at RBC Economics Research, said “we’re still a long way distance from writing off household debt from the list of top vulnerabilities for Canada’s economy.”
Statistics Canada also reported that household net worth rose 1.2 per cent during the period, helped by gains in property values and stock markets.
Household liabilities increased 1.6 per cent, the strongest gain in two years as mortgage debt and consumer credit added 1.4 per cent and 1.9 per cent, respectively, according to the government report.
“No big surprises here,” TD Bank senior economist Brian DePratto said in a note. “Another quarter of rising equity markets, together with recovering real estate values drove net worth higher even as households started to pick up the borrowing pace a bit.”
BMO noted that the debt-to-asset ratio rose slightly to 16.9 per cent, showing that households have just less than $6 of assets for every dollar of debt. It also pointed out that homeowners’ equity in property fell a tad to 73.7 per cent.
“Although it has been trickling lower in the past couple of years, the big picture is that it has remained remarkably stable over the last three decades and remains much higher than in the U.S.,” Thiagmoorthy said.
On the national level, the ratio of federal government net debt to gross domestic product improved to 26.2 per cent in the quarter for the second consecutive three-month period as growth in GDP outpaced the growth in federal government net debt, the agency said.