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Household debt burden near record high, but property values rising at slowest pace since 2009

Briefing highlights

  • Canadian debt burden near record high
  • Property values rise at slowest pace since 2009
  • Home sales sink in February, CREA reports
  • Markets at a glance
  • BlackBerry, Chen agree to contract extension

Households juggle big debt burden

Canadian households are juggling a massive debt burden, though by all accounts it appears to be getting better.

And in a sign likely to warm the hearts of policy makers, housing markets are slowing.

We're also getting richer, according to Statistics Canada.

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A key measure of the consumer debt burden, credit market debt to disposable income, was relatively flat in the fourth quarter, at 170.4 per cent per cent, compared with a revised 170.5 per cent in the earlier three-month period. This comes on the heels of the Bank of Canada noting that credit growth has slowed for three months now.

What that means is that Canadians owed $1.70 for every dollar they have to spend.

"Seasonally adjusted, it actually edged up slightly in Q4, but we're splitting hairs," said Bank of Montreal senior economist Robert Kavcic.

"The main message is that debt-to-disposable income is levelling off with a softer housing market activity, and could very well roll over in the first half of 2018 with Toronto home sales (and national credit growth) cooling further."

Leverage, or the ratio of debt to assets, inched down to 16.6 per cent from 16.7 per cent.

Total credit, which includes mortgages and other debt, hit $2.1-trillion in the quarter, the federal agency said Thursday.

Mortgages accounted for almost $1.4-trillion of that, with consumer credit at $630.4-billion.

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Mortgage debt rose 4.9 per cent over the course of last year, and consumer credit 5.3 per cent.

At the same time, the net worth of households rose 2.1 per cent in the final three months of 2017, to almost $11-trillion.

But note this: Values of residential real estate rose at a "relatively weak pace," just 0.6 per cent in the quarter and 3.4 per cent for the year.

"This was the smallest annual increase since 2009 and well below the 8.1-per-cent gain recorded in 2016, as residential real estate prices moderated throughout the year."

The central bank is monitoring the impact of its earlier rate hikes on consumers who are among the most indebted in the world, though it noted last week that growth in household credit has slowed for three months in a row.

It appears that our debt habits are "turning a corner," as Royal Bank of Canada economist Josh Nye put it.

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"With interest rates expected to rise further and housing regulations tightening at the federal and provincial level, the peak in debt growth could very well be behind us," Mr. Nye said.

"That should be viewed as a positive development by the BoC, though progress on reducing the 'key vulnerability' of elevated household debt will likely be very slow, he added.

"While more moderate debt growth is a welcome development, policy makers will want to be sure they aren't hitting the brakes too hard."

Indeed, how consumers react to its tightening is a big unknown for the Bank of Canada, and "one that will likely keep them cautious in raising rates," Mr. Nye said.

Canadians have been warned for years about their nasty debt habits, mostly recently on Sunday when the Bank for International Settlements, a group made up of the world's central banks, again red-flagged the country as it released its early warning signals on potential stress in the financial system.

Moody's Investors Service joined the chorus this week, too, in a report on Canada's banks.

Borrowers are "vulnerable to an economic downturn, despite strong consumer credit quality metrics to date," the U.S. ratings agency said.

"The strong credit quality of Canadian consumer loans, thanks largely to record low unemployment in recent years, is under threat on several fronts: Debt-servicing costs are increasing because of interest rate hikes, the proportion of riskier uninsured mortgages is on the rise, and longer auto loan terms point to greater borrower vulnerability," Moody's warned.

"As debt-to-income levels continue to edge up, the first bite into bank asset quality will be felt in unsecured credit card portfolios."

Defaults have been "very low," the agency added, but noted that debt-servicing needs will probably rise amid the Bank of Canada's rate hikes.

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