Canada Household Debt Ratio Rises to Record in 2nd Qtr

The ratio of Canadian household debt to disposable income rose to a record in the second quarter on increased mortgage borrowing, even after policy makers took steps to slow the housing market.

Credit-market debt such as mortgages rose to 163.4 percent of disposable income, compared with a revised 162.1 percent in the prior three-month period, Statistics Canada said today in Ottawa. Mortgage borrowing rose 1.7 percent to C$1.11 trillion ($1.08 trillion).

“That isn’t comforting,” said Carlos Leitao, chief economist at Laurentian Bank Securities in Montreal. “At this point in the cycle we would have thought this would have stabilized.”

Canada’s housing market had shown signs of moderating after a surge in condominium construction in Toronto and Vancouver pressured Finance Minister Jim Flaherty to tighten mortgage rules four times. Housing starts fell 6.6 percent in August led by multiple-unit work, and Bank of Canada Governor Stephen Poloz reiterated on Sept. 4 that household imbalances appear to be improving.

Canada’s dollar fell for a second day after the report, weakening 0.2 percent to C$1.0347 per U.S. dollar at 4:00 p.m. in Toronto. One dollar buys 96.65 U.S. cents.

The rise in the debt-income ratio follows two quarters of declines. The growth in household credit market debt rose to 1.6 percent in the April-June period from 0.5 percent in the previous quarter, Statistics Canada said.

Spring Lending

Part of the increase is due to a traditional rise in mortgage lending in the spring when more people look for houses, Royal Bank of Canada economist David Onyett-Jeffries wrote in a note to clients. Statistics Canada doesn’t adjust the figures for seasonal swings.

The annual pace of household credit growth slowed to 4.9 percent in the quarter, Onyett-Jeffries said, the slowest pace since the end of 2001.

The housing boom that helped lead the world’s 11th largest economy out of the 2008 global financial crisis was fueled by some of the lowest mortgage rates in decades as the Bank of Canada cut its key rate to a record low 0.25 percent. Mortgage rates are now rising and that may curb demand according to Derek Burleton, deputy chief economist at Toronto-Dominion Bank.

“The rebound in housing has raised eyebrows,” he said. “There are some near term upside risks to housing and the debt ratio, but it’s reasonable to expect the ratio remains quite stable.”

Price Drop

Higher mortgage rates along with growth in the supply of homes will trigger a 10 percent to 15 percent drop in home prices, Sun Life Global Investments Inc. Chief Investment officer Sadiq Adatia said yesterday at the Bloomberg Canadian fixed-income conference in New York.

“I’m not panicking,” said Benjamin Tal, deputy chief economist at CIBC World Markets in Toronto. “The only time this ratio goes down is in a recession, as we saw in the U.S. That’s the only time we see real deleveraging.”

“It was a record high last year, it’s a record high now, it will be a record high next year,” Tal said. “The issue is what is the rate at which credit is rising, and this rate is slowing down notably.”

National net worth rose 3.1 percent to C$7.31 trillion in the second quarter, Statistics Canada said, reflecting rising real-estate values. On a per capita basis, the increase was to C$207,300 from C$201,800.

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