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The debt burden carried by Canadian households edged up to yet another record high in the fourth quarter of 2015, as debt continued to outpace sluggish income growth.
Statistics Canada reported Friday that the ratio of household credit-market debt to disposable income, the key measure of the debt load, rose to 165.4 per cent in the quarter, eclipsing the previous record of 164.5 per cent set in the third quarter. (The third-quarter number was revised from an originally reported 163.7 per cent.) That means that at the end of the year, households held more than $1.65 in debt for every dollar of annual disposable income.
Debt rose 1.2 per cent in the fourth quarter, amid persistent low interest rates, while disposable income crept up 0.6 per cent, the slowest since the first quarter, reflecting the renewed sluggishness of the economy in the final quarter of the year. Fourth-quarter gross domestic product grew at an annualized rate of just 0.8 per cent.
The household debt-to-income ratio had eased from record levels in the first half of last year, but picked up again in the second half, after the Bank of Canada cut interest rates in July for the second time in the year.
Statscan said total household credit-market debt (mortgages plus consumer credit) rose 1.2 per cent in the fourth quarter, to $1.92-trillion. Mortgage debt rose 1.6 per cent, to $1.26-trillion, while consumer credit (which includes credit cards, car loans, personal lines of credit and other personal loans) rose 0.3 per cent to $573.6-billion.
For all of 2015, household debt rose 4.9 per cent, the fastest pace since 2011. Mortgage debt grew 6.3 per cent, also the fastest since 2011, Statscan said.
“Interest rates have been hovering at a low level for a long time, which has played a significant role in spurring Canadians’ appetite for taking on more debt,” said Scott Hannah, chief executive officer of the Credit Counselling Society, a non-profit consumer debt-counselling group, in a news release.
But measured against total assets and total net worth, Canadians’ household debt ratio actually edged down slightly in the fourth quarter, to 17.1 per cent and 20.6 per cent, respectively. The country’s total household net worth rose 1.6 per cent in the quarter, to a record $9.48-trillion, helped by healthier financial markets and continued strength in housing values. Statscan noted that for the full year, households’ financial assets grew a modest 5.4 per cent, down from about 8 per cent in each of the previous three years, “as the domestic market weakened considerably in 2015.”
“While only improving modestly, these metrics indicate that, in aggregate, households have a sizable cushion to absorb the impact of an unforeseen macroeconomic shock,” said Royal Bank of Canada economist Laura Cooper in a research note. However, she added, “This update on the state of household indebtedness indicates that the resiliency of the household sector to absorb adverse income and interest rate shocks continues to deteriorate.”
The Bank of Canada has consistently expressed concern about the elevated levels of household debt, which pose a risk to Canada’s financial stability in the event of a sharp economic downturn that could seriously strain the ability of large numbers of consumers to meet their debt payments.
Earlier this week, in the announcement of its latest interest-rate decision, the central bank noted that “financial vulnerabilities continue to edge higher,” as the oil shock has dealt a serious blow to incomes in Alberta and fuelled increased migration to the already high-demand real estate markets of Vancouver and Toronto.
But given the country’s sluggish economy, the Bank of Canada has shied away from using higher interest rates to slow debt growth, instead urging tighter regulations on mortgage lending to tap the brakes. In response, the federal government in December introduced higher down-payment requirements on homes between $500,000 and $1-million, which took effect last month.
“The emerging slowdown in consumer credit accumulation suggests households may be heeding the perpetual warnings about the vulnerabilities created by elevated debt levels, although the sustained uptrend in mortgage balances tempers this enthusiasm,” Ms. Cooper said. “The implementation of new mortgage regulations … may curb the appetite for mortgage loans to some extent, which would help to pour some cold water on the sustained uptrend in outstanding mortgage balances and help to alleviate the heightened vulnerability posed by elevated household indebtedness in Canada.”