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Canadians’ household debt burden edges higher in second quarter

Household net worth rose by 2.3 per cent in the second quarter, driven primarily by a continued rise in real estate values


A key measure of household debt has edged back up toward record levels, but thanks to the hot housing market Canadians have never been richer.

Statistics Canada's quarterly national balance sheet report Friday showed household credit market debt (consumer credit, mortgages and other loans) rose 1.3 per cent in the second quarter of the year from the first quarter, outpacing sluggish 0.6-per-cent growth in disposable income.

As a result, the ratio of credit debt to disposable income, a closely watched measure of the household debt burden, rose to 163.6 per cent, inching up after two successive declines but remaining just below the record 164.1 per cent hit last year.

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But the longer-term slowdown in debt growth remained intact, according to a Statistics Canada report Friday, with a year-over-year rise in household debts of just 4.1 per cent, the slowest pace since 2001. On top of that, the debt service ratio – interest payments relative to disposable income – dropped to 6.9 per cent for the lowest in on records dating back 24 years.

Meanwhile, household net worth rose 2.3 per cent in the second quarter, to a record $8.1-trillion (or $227,000 per person), driven primarily by a continued rise in real estate values. As a result, the ratio of household credit market debt to net worth – another gauge of consumers' capacity for debt – fell to 22.3 per cent from 22.5 per cent from the first quarter, the lowest level in six years.

Household sector leverage indicators (%)

Household debt service ratio (household mortgage and non-mortgage interest paid as a proportion of disposable income) declined to 6.9% in the second quarter. However, household credit debt (consumer credit, mortgages and other loans) rose by 1.3 per cent in the quarter.

SOURCE: Statistics Canada

The Bank of Canada has long expressed concern about the stubbornly high consumer debt in Canada, as it leaves consumers at heightened risk in the event of an economic downturn or a rise in interest rates. The central bank said in its latest interest rate policy statement earlier this month that it believes the risks associated with household debt "have not diminished." But economists have been encouraged by the slowing pace of debt accumulation and improved outlook for income growth in recent quarters, while rising stock market and home values have increased households' asset base, improving their capacity to carry debt.

"The sustained slowing in total household credit growth, along with rising household wealth and income gains, will help to lessen the risks of a sharp deterioration in households' ability to absorb rising debt obligations when interest rates gradually normalize," Royal Bank of Canada economist Laura Cooper said in a research note.

"Canada's household balance sheet has improved considerably over the last year, and borrowing remained very modest in the second quarter. Disappointing growth in personal incomes resulted in the debt-to-income ratio remaining broadly unchanged for the quarter," Toronto-Dominion Bank economist Leslie Preston said in a report. "However, household indebtedness is still high … Elevated debt levels suggest that household spending will remain moderate over the next few years, and more of Canada's economic growth will have to be driven by business investment and exports."

The second-quarter rise in household consumer credit came from all sources – mortgages, non-mortgage loans and consumer credit (primarily credit cards). Consumer credit rose 1.4 per cent in the quarter, its biggest increase since the 2012 third quarter. Mortgage debt rose 1.4 per cent, its biggest rise in three quarters. But on a year-over-year basis, mortgage debt growth is also at a 13-year low, at 5.2 per cent.

The national total net worth (including households, businesses and governments) rose 0.7 per cent in the quarter, to a record $7.9-trillion. It was the slowest growth pace since the third quarter of 2012, because of a decline in the country's international investment position, as a stronger loonie and rising Canadian equity markets raised the value of Canadian assets held by foreigners.

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In the corporate sector, non-financial corporations added $26.5-billion of debt in the second quarter, but the corporate debt-to-equity ratio fell to 183.3 per cent from 186.5 per cent in the first quarter on a market-value basis, reflecting stronger equity market values.

Government gross debt increased by $24.8-billion in the quarter, as government borrowings totalled $26.9-billion. But the ratio of net government debt to gross domestic product, the key measure for assessing government debt burden, fell to 50.1 per cent from 50.8 per cent in the first quarter. The federal government's debt-to-GDP ratio fell to 32.3 per cent from 33.1 per cent in the first quarter, while debt-to-GDP for all other levels of government rose to 30.5 per cent from 30.2 per cent.

National net worth, per capita

Household net worth advanced 2.3% in the second quarter, led by a gain in the value of household real estate.

SOURCE: Statistics Canada

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