Canada Household Debt Ratio Posts 2nd Drop From Record

Canada’s ratio of household debt to disposable income fell in the first three months of 2014, the second straight quarterly decline from a record on the slowest mortgage borrowing in five years.

Credit-market debt such as mortgages fell to 163.2 percent of disposable income, compared with a revised 163.9 percent in the fourth quarter and a record 164.1 percent in the third quarter of last year, Statistics Canada said today in Ottawa.

Mortgage debt rose 0.6 percent to C$1.1 trillion ($1 trillion) in the first quarter, the slowest pace since 2009, the agency said. Disposable income rose 0.8 percent while consumer credit-market debt gained 0.3 percent.

Bank of Canada Governor Stephen Poloz said June 12 indebted consumers fueling a housing boom pose the biggest domestic threat to the country’s financial system. Canada has tightened mortgage rules since 2008 over concern about overheated markets, with much of the focus on condominiums being built in Toronto, the nation’s largest city.

“Today’s broad results are a tantalizing hint that the corner is turning for household debt, and lend support to the Bank of Canada’s view that imbalances are evolving ‘constructively,’” said Doug Porter, chief economist at BMO Capital Markets in Toronto.

Housing Risks

Other measures suggest Canadians are able to repay their debts even as their total obligations have risen to record levels. Interest payments made up just 7.2 percent of disposable income, close to the fourth quarter’s 7 percent that was the lowest in records back to 1990, Statistics Canada said.

Household net worth rose 2.5 percent to C$7.89 trillion in the first quarter, or C$222,600 per capita.

Poloz said this month Canada’s home prices are headed for a “soft landing,” rather than the sharp decline some analysts had forecast, and there are signs housing is picking up again after a sluggish first quarter. The federal housing agency reported June 9 new home building was the strongest in May in seven months. Canadian realtors also recorded their biggest sales gain in almost four years in May with a 5.9 percent increase, while prices climbed 7.1 percent from a year earlier.

The risk to Poloz’s “soft-landing view for household finances is that the recent strength in home prices will trigger a re-acceleration in mortgage borrowing,” BMO’s Porter said in his note.

Finance Minister Joe Oliver met with private economists June 16 to discuss topics including the housing market. Oliver told reporters afterward he still expects a soft landing and regulatory changes have helped damp the risks.

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