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Briefing highlights

  • ‘Canadians love debt’
  • What observers say about our debt levels
  • Wal-Mart extends Visa ban in Canada
  • Video: Use of social media in the office

How we owe

I once told a bank employee, who’d helped me out with an issue, that I was forever in her debt.

Obviously I didn’t mean it literally, but the latest report from Statistics Canada suggests that I really am. Me, and a whole bunch of other people who are beholden to their banks.

Canadians now owe about $1.68 for every dollar of their disposable income, according to that report.

As The Globe and Mail’s Rachelle Younglai reports, the key measure of household credit market debt to disposable income rose in the second quarter to a record 167.6 per cent, compared to an already elevated 165.2 per cent in the first three months of the year.

That’s because borrowing rose by 2 per cent to far outstrip what Statistics Canada described as the “weaker-than-normal” rise in disposable income, of just 0.5 per cent.

The pace of our borrowing picked up, to $29.2-billion, of which $19.1-billion was mortgage debt.

There’s another side to this, of course, in this era of ultralow interest rates.

“As interest rates have remained at historical lows, the amount of mortgage principal paid by households has increased, steadily approaching the total amount of mortgage interest paid,” the agency said.

The Statistics Canada report brought fresh warnings with it.

“When interest rates are low, it’s tempting to take out loans and buy things on credit, but we have to remember that interest rates will rise eventually,” said Scott Hannah, the chief of the Credit Counselling Society.

“If we’re already struggling to manage our debts now, things are only going to get more challenging when the cost of borrowing rises.”

If you want to get a sense of just what this all means to the Canadian family, compare 2016 with 2000.

Royal Bank of Canada did just that, and found a sharp difference in the impact of higher mortgage rates on disposable income.

RBC estimates that every one-percentage-point rise in mortgage rates would now “eat up” an added 6 per cent of disposable income, compared with 3 per cent in 2000.

“Robust housing activity underpinned demand for mortgages in the first half of 2016, with the anticipated slowing in sales setting up for an easing in the pace of credit accumulation,” RBC economists Craig Wright, Dawn Desjardins, Paul Ferley and Nathan Janzen said in a much broader report on the economy and markets.

“The growth in debt balances over the past several years offset the impact of low interest rates on debt service payments, which remained relatively steady at 14 cents per dollar of disposable income,” they added.

“That said, the larger pool of debt means that household balance sheets are more sensitive to increases in interest rates.”

Of course, we’re getting richer at the same time.

Net worth among Canadian households rose 1.9 per cent in the second quarter, driven largely by real estate. Stocks also helped push that up.

Here’s what observers have to say:

“Canadians love debt, and with interest rates this low, why wouldn’t they? Households, governments, businesses all saw larger debt burdens in the second quarter. Most attention focuses on the household sector, which saw another increase in household debt burdens. Growth in household borrowing has picked up since the Bank of Canada cut interest rates in 2014. It may be somewhat reassuring to point out that, at 5.5 per cent year over year, the pace of debt accumulation is well below its pre-recession pace. The trouble is, so is income growth.” Leslie Preston, Toronto-Dominion Bank

“Even after adjusting for seasonal factors, the surge in the debt-to-income ratio (largest jump in nearly seven years) highlights the increasingly precarious position that Canadian households could find themselves in should an unforeseen shock materialize. The ongoing trend of debt accumulation outpacing disposable incomes is accompanying higher asset valuations, notably real estate; however, the rise in collateral values masks the underlying build-up in household vulnerabilities.” Laura Cooper, RBC

“The upward trend in household debt, which started as far back as we have data (the series starts in 1990), is showing no signs of ending anytime soon. While it looks as though the Vancouver housing market is cooling after the foreign buyers’ tax was implemented, the Toronto market remains very strong, and others are showing signs of improving as well. Some deceleration in disposable income growth also served to push debt ratios higher.” Benjamin Reitzes, BMO Nesbitt Burns

Home sales dip

Home sales across Canada slipped in August by 3.1 per cent from July, but that hardly tells the story.

It’s true that sales fell in 60 per cent of the markets measured by the Canadian Real Estate Association, but so much of the drop was led by the Vancouver area.

Also worth noting is that sales in Canada are still up by 10 per cent from a year ago.

And what you really care about: The MLS home price index showed a jump of almost 15 per cent from a year ago.

“Double-digit home price growth was a tell-tale sign of overheating in Canada’s two largest markets - Toronto and Vancouver,” said TD economist Diana Petramala.

“However, the latter has begun a sharp cool-off in recent months, turning ice-cold in August. The average home price correction in Vancouver has already exceeded our expectations for a 10-per-cent peak-to-trough correction, falling particularly sharply in August,” she added.

“We expect some of the extreme weakness in August to be reversed in the coming months as the shock of the new land transfer tax on foreign buyers dissipates. Nonetheless, we expect to the market to remain weak at least through early 2017.”

Wal-Mart expands Visa ban

Wal-Mart Canada Corp. is going ahead with its threat to expand beyond three Thunder Bay stores its campaign to refuse Visa credit cards as the retailer’s battle over service fees escalates, The Globe and Mail’s Marina Strauss reports.

Starting on Oct. 24, Wal-Mart will stop accepting Visa in all 16 of its Manitoba stores, a spokesman said. The giant discount retailer will start posting signs in those stores to notify customers of the change, he said.

Video: Use of social media in the office

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