Canadians carried a record debt burden in the third quarter – but the load actually looks a little lighter than we previously thought.
Statistics Canada said household total credit-market debt (mortgages, consumer credit and non-mortgage loans) rose to 162.6 per cent of disposable income in the quarter, as consumers' continued borrowing for home purchases outweighed the tepid growth in their disposable incomes.
It's the biggest debt-to-disposable-income figure on record for Canada – a result of a major downward revision to the previous records.
Statscan announced that it trimmed its numbers going back to the start of 2011, as part of its annual adjustments to the national balance sheet and financial flow accounts. The result was that the previously reported record, 164.1 per cent in the third quarter of 2013, was reduced to 161.7 per cent. The 2014 second quarter's debt-to-disposable-income ratio was trimmed to 161.5 per cent from its original 163.6 per cent.
That resulted in a record debt load in the latest quarter, but at a level that's not quite as onerous as the pre-revision numbers had indicated.
"Given the record debt ratio, there's nothing here to change the Bank of Canada's view that high household debt is a significant risk to financial stability. However, the downward revision to the debt figures and continued strength in net worth should keep concerns from worsening," Bank of Montreal senior economist Benjamin Reitzes said in a research note.
Last week, the Bank of Canada cautioned that "high consumer debt loads and imbalances in the housing market" are making Canada's financial system more vulnerable, and "remain a concern." The housing market remains stubbornly strong, despite prices that, by the central bank's new estimates, are between 10 and 30 per cent overvalued.
Total credit market debt rose 1.5 per cent to $1.81-trillion in the latest quarter, a pace that exceeded that of disposable income, Statscan said. The bulk of the $27.4-billion in borrowing in the quarter was for mortgages.
But other measures of consumers' capacity for debt looked more encouraging. The debt-service ratio – defined as interest paid on mortgage and non-mortgage debt as a percentage of disposable income, an indicator of buyers' ability to make their payments – dipped to a record low of 6.8 per cent in the third quarter, reflecting low interest rates. The ratio of credit market debt to household net worth rose slightly to 21.8 per cent from 21.7 per cent, but remained near six-year lows, as the strong housing market has boosted the value of household assets.
Household net worth rose 1.3 per cent in the third quarter to a record $8.3-trillion, but the growth pace slowed from 2.2 per cent in the second quarter. On a per-capita basis, household net worth rose to a record $232,200.
Separately, the Canadian Real Estate Association reported that home sales were flat in November compared with October, and were up 2.7 per cent from a year earlier. CREA said year-to-date sales are up 5 per cent from the same period in 2013, but are a more modest 2.4 per cent above the 10-year average. The MLS Home Price Index was up 5.2 per cent from a year earlier, down slightly from October.
Craig Wright, chief economist at Royal Bank of Canada, noted that household debt accumulation has already cooled considerably in the past few years, from double-digit growth in the pre-recession years to 13-year lows of just over 4 per cent today. Meanwhile, an improving labour market should temper the debt risk and lift the income side of the debt-to-income ratio.
"We're still elevated, [but] I think we'll see more moderate debt growth, moving in line with income," he said.
But other economists worry that the recent sharp drop in oil prices could elevate the risks surrounding household debt, as it poses a threat both to the country's total incomes and to the health of some of the country's more bloated regional housing markets.
"The recent collapse in oil prices is likely to have an adverse effect on Canada's growth over the next year, and particularly on incomes in oil-producing regions," said Toronto-Dominion Bank economist Leslie Preston.