The outlook for Canadian household debt, a large share of which is tied to mortgages, is looking brighter, a report from one of Canada’s biggest banks suggests.
In a Focus On Canada’s Household Debt report published June 21, RBC Economics notes that Canada’s household debt-to-income ratio has declined for two straight quarters. The report is a response to Statistics Canada’s latest National balance sheet and financial flow accounts for the first quarter of 2018.
According to the Statistics Canada release, the national household debt-to-income ratio was 168 per cent in Q1 of this year, down from 169.7 in the previous quarter. The ratio represents credit market debt, which includes consumer credit as well as mortgages and other loans, as a proportion of households’ disposable income. Statistics Canada puts it another way: “In other words, there was $1.68 in credit market debt for every dollar of household disposable income,” the national housing agency explains.
RBC took the easing ratio as a positive sign. “Clearly, macro prudential measures and the cooling of Canada’s housing market are having the desired effect on the liabilities’ side of the ledger,” writes RBC Senior Economist Robert Hogue, suggesting tougher mortgage stress testing introduced at the start of the year is playing a part.
“We find that accelerating disposable income and slowing mortgage growth are the driving forces behind the recent improvement in household indebtedness,” Hogue explains. In fact, household disposable income increased by 5 per cent annually in the first quarter of this year. That’s the quickest pace in nine years, the bank points out. At the same time, households’ collective credit market debt rose by 4.5 per cent, a three-year low. In the run-up to the Great Recession, annual credit growth had surpassed the 12-per-cent mark.
“Significant deceleration in mortgage growth entirely accounts for the easing pace of debt accumulation since 2016,” Hogue states in the report. “Rising interest rates also help restrain debt accumulation though at the same time they pose a risk to Canadian households’ ability to manage their debt service costs. Yet to date, rapidly rising household income is keeping that risk in check,” says Hogue.
In Q1 2018, households in Canada had racked up a total of $2,134.3 billion in credit-market debt, according to Statistics Canada. RBC will continue to look for signs of interest rates becoming too much for Canadian households to bear, Hogue suggests. RBC’s report isn’t the only piece of encouraging commentary for homeowners. The RBC report follows recent commentary from the Canada Mortgage and Housing Corporation suggesting cooling in Ontario’s housing market, the country’s most active provincial market, isn’t a repeat of the crash that hit Toronto hard in the early-‘90s.
Photo credit: Flickr user frankieleon
