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Bank of Canada Governor Mark Carney

Peter Power

Canadian households continued to sink further into debt as consumers took advantage of low-interest rates to take out mortgages, Statistics Canada said Monday.

The ratio of household credit market debt -- including mortgages, consumer credit and loans -- to disposable income rose to 147.3 per cent in the first quarter, surpassing the revised 146.2 per cent mark in the fourth quarter of 2010.

The rising debt has taken a bite out of consumer spending, but mortgage debt advanced "reflecting relatively stable borrowing costs as well as higher housing resale and renovation activities," according to the federal agency.

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The report came on the heels of concerns expressed by the Bank of Canada Governor Mark Carney, urging Canadians to better manage their debt as they take on excessive mortgages.

In fact, Canadian debt ratios are now "leaving their U.S. counterparts in the rear-view mirror, despite the repeated exhortations by domestic policymakers to rein in borrowing," said Douglas Porter, deputy chief economist at BMO Nesbitt Burns.

"The prolonged period of ultra-low interest rates runs the risk of pumping a debt or housing bubble," Mr. Porter said.

And if debt growth doesn't slow down further, expect "Governor Carney to become more vocal in his warnings to households and financial institutions, to potentially push for another round of regulatory moves to curb credit growth, and to possibly raise interest rates more aggressively than he or the economy would like."

Separately Monday, Finance Minister Jim Flaherty suggested that he is now more comfortable with the health of Canadian housing, saying he is not considering any further action to cool the mortgage market. While there are some hot spots, including Vancouver's condominium market, it isn't enough to prompt a change in mortgage rules.

Toronto-Dominion Bank economist Diana Petramala said while household credit has slowed, and indebtedness has stabilized, households remain highly leveraged.

"In our view, a debt-to-income ratio of 147 per cent is still excessive, with a more optimal level for indebtedness in the range of 138 to 142 per cent," she said.

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Overall, the household net worth in Canada was up 1.0 per cent to $6.3-trillion in the first quarter after a 2.4 per cent increase in the fourth quarter. This deceleration was reflected in both financial and non-financial assets, the federal agency said, adding that household net worth per capita rose to $184,700 in the first quarter, up from $183,300 in the fourth quarter.

"Households should also plan for a slower pace of asset growth going forward," Ms. Petramala said in a statement. "In particular, with a large share of financial assets tied to equity gains, the household balance sheet is likely to suffer a setback in the second (quarter) given that the S&P/TSX has retreated roughly 9 per cent since the end of the quarter."

Data for the second quarter will be released by Statistics Canada on September 13.

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