Canadian household debt levels reach a new high

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Canadian households are still hungry for debt, sending levels to another record in the third quarter even as the pace of accumulation is cooling.

Debt levels, as tracked by the level of household credit market debt to disposable income, hit a record 164.6 per cent in the third quarter of the year, up from 160.9 per cent a year ago, Statistics Canada said Thursday.

That means Canadian families now owe nearly $1.65, on average, for every dollar of after-tax income they earn.

Canadian household debt levels have surpassed those of the United States in recent years, fuelled by low interest rates and hot house prices. The streak is such that elevated household indebtedness, along with "stretched" valuations in some parts of the housing market, are the biggest domestic risks in the Canadian economy, the Bank of Canada warned last week.

And while Canadians are slowing the pace at which they're piling on debt, the unprecedented levels are leaving many households vulnerable to economic shocks such as a job losses, interest rates hikes or a sudden slide in house prices.

The latest climb in debt levels "should fuel the Bank of Canada's concerns," said Benoît Durocher, Montreal-based senior economist at Desjardins Securities.

"Under these conditions, monetary authorities will surely continue to repeat their warning about eventual interest rate hikes for some time."

The pace at which Canadians are racking up debt, however, is slowing.

The annual rate of increase in household debt has subsided through this year, and credit growth eased to its lowest pace in about a decade of 5.8 per cent in the quarter, notes David Onyett-Jeffries, an economist at Royal Bank of Canada.

That's about half the pace of growth seen during the 2004-to-2008 period, said Diana Petramala, an economist at Toronto-Dominion Bank. Nonetheless, "household debt remains excessive and is a notable risk to future Canadian economic growth."

Indeed, the pace of debt accumulation has eased before, only to rev up again, the central bank's Governor, Mark Carney, said this week.

"I would just caution that we have seen in the past, when there have been policy measures taken, movement in these variables that are then followed by a reacceleration," he said at a press conference Tuesday, adding that there's a need to be "vigilant" about monitoring debt levels – and adjusting policy if there are clear signs of overaccelerating.

The bank's financial stability report last week highlighted the risk of higher debt loads. It noted that, while the growth of household credit has moderated in the past six months, credit still grew at a faster pace than disposable income.

An apples-to-apples comparison of Canadian and U.S. household debt levels shows the ratio of debt-to-disposable income was 154 per cent in Canada in the quarter, a much higher level than the 144 per cent recorded in the U.S. in the same period, according to Desjardins.

Still, by that measure, the Canadian ratio remains well below the peak seen in the United States.

And while debt keeps rising, assets are rising even more quickly, noted Bank of Montreal economists.

Net household worth has returned to near record levels recorded in 2007, it said.