Canada's Gravity-Defying Household Debt Swells to C$2 Trillion

Updated on
  • Obligations keep climbing on low rates and a real estate boom
  • Statistics Canada reports on third-quarter national finances

Canadian household debt has cracked the two-trillion-dollar ceiling.

The appetite for bank borrowing remained unabated in the third quarter, setting fresh records for total credit and mortgage borrowing, Statistics Canada reported Wednesday. The widely-followed ratio of household debt to after-tax income rose to another record high of almost 167 percent.

The numbers will intensify concern among policy makers the economy has become over-reliant on bank borrowing, and is vulnerable to a housing downturn and rising interest rates. The latest report covers the three months before Finance Minister Bill Morneau tightened mortgage lending rules again in October, a move designed to discourage Vancouver and Toronto home buyers from signing larger mortgages than they could handle.

“Household indebtedness continues to defy gravity and remains the Achilles heel of the Canadian economy,” said Charles St-Arnaud, senior economist at Nomura Securities International in London, who has worked in Canada’s finance department and central bank. “Continued increase in yields and job losses remain the biggest risks.”

Credit-market debt climbed to C$2.005 trillion ($1.53 trillion) from C$1.980 trillion in the prior quarter. Those obligations jumped by 1.3 percent in the third quarter, faster than the 0.9 percent gain in household income.

Erik Hertzberg/Bloomberg

Total consumer debt exceeded the size of Canada’s economy for a second straight quarter, accounting for 101.2 percent of gross domestic product in the July-to-September period.

Debts have climbed alongside the Vancouver and Toronto housing boom, fueled by job growth and rock-bottom borrowing costs.

Bank of Canada Governor Stephen Poloz cut interest rates twice last year to 0.5 percent, saying he needed to act to ease damage to incomes from an oil crash. Poloz is due to present the bank’s latest Financial System Review on Thursday morning. The semi-annual report will likely reiterate household imbalances are still elevated, although they should be curbed over time by the new regulations.

Some other measures suggest consumers can afford to pay all the debt back. Household debt as a share of net worth remained at 20 percent in the third quarter, and debt-service payments were little changed at 14 percent of disposable income.

— With assistance by Erik Hertzberg

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