Household credit is defying gravity in Canada, expanding by more than 7 per cent year over year, a new analysis says.
"On an inflation adjusted basis, credit is rising at the fastest rate seen in any economic recession in the post-war era," Benjamin Tal, senior economist with CIBC World Markets, wrote in report published Tuesday.
The main driver is low interest rates. Even as Canadians added $44-billion to their total debt in the first half of the year, interest payments fell by $3-billion. In fact, interest payments as a share of disposable income now stand at 7.7 per cent, the lowest rate since 2006 and significantly below the more than 10 per cent during the 1991 recession, Mr. Tal said.
"This in a nut shell is the reason for the strong rebound in real estate activities in the Canadian mortgage market."
National home sales were up 18.5 per cent year-over-year in August, with the average home price rising 11 per cent, according to the Canadian Real Estate Association.
The bad news is that mortgage arrears are rising. The figure has reached 0.42 per cent, up from a record low of 0.24 per cent in mid 2007. CIBC expects the rate to continue to climb over the next six to 12 months.
Canadians have been tapping into personal lines of credit with greater frequency, increasing the overall size of this kind of debt by 20 per cent. At the same time, the number of these loans in arrears is also rising, Mr. Tal said.
Growth in credit card use is soft and will likely continue to be so for the next six months, as this type of debt is both highly cyclical and a barometer of consumer sentiment. Bad credit card debt is at 1.2 per cent, 30 per cent above the level seen in early 2008, he said.
On the whole, overall household debt increased by 3.4 per cent while personal disposable income declined by 0.2 per cent, resulting in a higher debt-to-income ratio. Household debt is now 140 per cent of income, up from 131 per cent a year earlier. This figure is moving in the opposite direction than in the United States, where the ratio has fallen for the last two quarter, Mr. Tal said.
While indebted Canadians are well insulated from interest rate hikes for now, that could change if the real estate market gets too hot in the months ahead.
The Bank of Canada's conditional commitment not to raise rates until the middle of next year hinges on a well-behaved housing market, Toronto-Dominion Bank economists Craig Alexander and Grant Bishop wrote in a report published Tuesday.
The key risk for tighter monetary policy is not an unexpected jump in consumer prices, but excessive strength in real estate prices, they argue.
The Bank of Canada will "seek to lean against signs of emerging asset bubbles," but its view at the moment is that the recent resurgence in housing is temporary, they said.Report Typo/Error