Signs household debt problem may be stabilizing, although new record hit in Q4

OTTAWA – Canadian households continue to get into deeper debt, but the most recent data also offers a bit of a respite — credit accumulation is slowing and there’s evidence the Bank of Canada is correct in saying the problem appears to be stabilizing.

A Statistics Canada report Friday calculates the average household owed a record $164.97 in market debt for every $100 of disposable, after-tax income they earned in the fourth quarter of 2012 — slightly more than the previous high of $164.7 in the prior three months.

That is only a few percentage points shy of where U.S. household debt levels reached before the country’s real estate market collapsed, and was a key reason why Finance Minister Jim Flaherty tightened mortgage rules last July.

But the latest data represents progress in the effort rein in risky levels of household debt in Canada, say analysts.

The fourth-quarter increase in the debt ratio was the smallest in a year, while household net worth actually increased by 1.4 per cent, thanks to gains in the value of stock holdings and pensions.

Earlier this month, the Bank of Canada signalled it was not as worried about debt as it had been, judging that with a “more constructive evolution of imbalances in the household sector, residential investment is expected to decline further from historically high levels.”

The debt report came the same day the Canadian Real Estate Association reported resales of houses and condos fell 2.1 per cent in February, from the previous month, and were down 15.8 per cent from a year ago. As well, the average price for homes sold in the month slipped by about one per cent from a year ago to $368,895.

Both reports suggest that although debt and housing remain at levels economists consider unsustainable, both appear headed for a soft landing.

“I wouldn’t want to bank on one or two quarters’ data (so) it’s a little early to declare victory,” cautioned Bank of Montreal chief economist Doug Porter.

“The reality is that almost whatever measure you look at, household debt is still up about three per cent from what it was a year ago.”

But by other measures, the problem doesn’t seem as acute. House debt to total assets and debt to net worth have come down over the past year.

As well, household equity as a proportion of real estate they owned remained at about 69 per cent.

Still, the high debt levels suggest that Canadians have little extra room to borrow and spend on big consumer ticket items, or more and bigger real estate, going forward. A TD report earlier in the week forecast that home price gains will average only about two per cent, essentially keeping up with inflation, over the next decade.

Also factoring into the cooling story is that despite healthy employment numbers in the past six months, Canadian’s per capita disposable income actually saw a slight dip in real terms over the past six months.

The proof whether debt escalation has been capped or is merely taking a breather may be determined by what happens in the housing market this spring and summer, believes TD Bank economist Jonathan Bendiner.

“With the low interest rate environment, there’s always the risk that debt could grow faster than incomes in the future,” he explained.

On a national accounts basis, net worth increased to $6.9 trillion in the fourth quarter, up one per cent from the third quarter of 2012. Higher prices for many assets led the advance, while national saving accounted for 29 per cent of the increase in national net worth.

Household borrowing in consumer credit, loans and mortgages totalled $14.7 billion in the fourth quarter, led by $11 billion in mortgage borrowing.

By the end of the quarter, mortgage debt hit $1.1 trillion, consumer credit debt stood at $477 billion and the level of debt was up 5.5 per cent on an annual basis.

Household net worth rose 1.4 per cent in the fourth quarter to $199,70 on a per capita basis.