Let's face it, Canadian households have become high-functioning debtaholics. We've curbed our habit, but we seem either unable or unwilling to shake it on our own. But there's some tough love on the way from our Uncle Sam that might help slap us straight.
Every time Canadians look like we're finally getting our households in order and regaining sanity about residential real estate, we relapse. New Bank of Canada statistics show that household debts for the three months ended Aug. 31 were up at a 4.8-per-cent annualized rate, the fastest in nearly two years. Canada Mortgage and Housing Corp.'s six-month moving average for housing starts hit an annual rate of nearly 198,000 in September, the highest since the end of 2012.
Canada's ratio of household debts to disposable income was a near record 164 per cent in the second quarter. While it has levelled off in recent quarters, debts again look to be growing faster than disposable income (up 3.9 per cent year over year in the second quarter).
This isn't just making the Bank of Canada nervous; some important people beyond our borders are looking our way with furrowed brows on their tall foreheads. This week, the International Monetary Fund warned us (again) that "high household debt and a still-overvalued housing market remain important domestic vulnerabilities" to Canada's economic stability. It suggested that the government might have to (again) implement "additional macroprudential measures," i.e. still-tighter rules on mortgage lending, to turn the tide.
Economists from Moody's Analytics (the research arm of the big debt-rating agency), visiting Toronto on Wednesday, expressed cautious optimism that Canada's housing market will achieve the soft landing that everyone has been hoping for – a moderation without a painful price correction. And they expect household debt accumulation to slow further. But it's going to take a long time, in part because Canadians aren't likely to actually reduce their debts, the way Americans did in the wake of the collapse of their housing market.
"I don't see it happening," said Moody's senior director Cris deRitis, noting that it has never happened before in Canada. But debt accumulation could slow to below the rate of inflation (so, declining in real terms) and below the expected rate of income growth. In this scenario, it will take about a decade before the debt-to-income ratio has returned to its historical "equilibrium" of about 110 to 120 per cent.
This kind of talk is par for the course. We hear phrases like "moderated," "slowed," "levelled off." But the rehabilitation of the debt-to-income ratio is still somewhere over the rainbow. We haven't stopped adding to our already considerable debt loads.
And really, why should we? Debt is cheap. The interest rate on Government of Canada 10-year bonds is barely 2 per cent. I can get a five-year mortgage for less than 3 per cent, a car loan for zero. I don't have a lot of incentive to control my consumer urges.
But the Bank of Canada, despite its long-standing and perhaps even increasing concern on this front, isn't about to lift a policy finger to push consumers onto the wagon. While the central bank has taken a tougher tone lately around the risk of overstretched household balance sheets, it has been much more vocal about the need to keep interest rates lower for longer, to keep the fragile economic recovery lurching forward – clearly its bigger priority.
But if Canada's central bankers aren't willing to act, their U.S. counterparts at the Federal Reserve might be about to do it for them.
In a speech last month, Bank of Canada Deputy Governor Timothy Lane said the tightening of monetary policy by the Fed – it is gradually winding up its quantitative easing program, a prelude to likely interest-rate hikes next year – "will tend to push up market interest rates in Canada." It's a de facto tightening of Canadian credit conditions that will tap the brakes on household debts and the housing market.
"The Bank of Canada can sit back, relax, and let the Fed take the punchbowl away," said Emanuella Enenajor, Canada economist for Merrill Lynch, in a research report this week.
Sounds easy, though not necessarily painless. Consumers will feel a sting, they'll likely temper their debt-fuelled spending and this will be a drag on the domestic economy. But given that U.S. rate hikes will come hand in hand with the continued acceleration of the U.S. economy, it's likely that Canada's exports to its massive trading partner will continue to pick up as rate hikes approach, offsetting any negative effects of the upward rate pressures on consumers.
For a Bank of Canada that feels its hands are tied, this might be about as fortuitous a scenario as it could hope for. And maybe – just maybe – it might nudge household balance sheets around their elusive corner.