Statistics Canada reported that the household debt ratio resumed its climb to record heights in the second quarter, but economists are generally sanguine about the move.
StatsCan said today that the debt-to-disposable income ratio rose to a record high in the second quarter, hitting 163.4%, up from 162.1% in the first quarter. This follows two successive declines in the ratio in previous quarters.
Given the long-standing concern about household debt levels among policymakers, the report may reignite those fears. “If you listen carefully, you might hear quiet gulps from the Bank of Canada after Q2 Canadian household debt ratios edged up again following two quarters of moderation,” says BMO Capital Markets in a research note on the results.
Indeed, BMO says that the previous quarterly declines in the debt ratio “likely played a big role in the [Bank’s] view that household debt was evolving more ‘constructively’. Now, the issue is whether the Q2 back-up in debt ratios casts serious doubt on this so-called constructive evolution,” it says.
Generally, economists indicate that they are not concerned. Indeed, RBC Economics says that, overall, the data supports the Bank of Canada’s view that household imbalances are moving in the right direction. “While the household debt-to-asset and debt-to-income measures deteriorated slightly in the quarter, this largely reflected the seasonal bounce in mortgage borrowing in the spring that is associated with the higher volumes of housing market activity during the peak home sales season,” it says.
“More importantly, the year-over-year increase in household credit growth eased to 4.9%,” it says, noting that this is the slowest pace of growth since the fourth quarter of 2001.
“Combined with gains in household net worth and income, the moderation in household debt growth points to an underlying improvement in consumer finances that helps to mitigate what policymakers have long highlighted as the largest domestic risk to the Canadian financial system,” it says.
TD Economics also says that it’s not surprising to see household indebtedness rise along with home sales, but it does not expect this trend to continue. “In large part, the increase in household indebtedness also reflects softer income growth over the first half of this year. Looking forward, as housing stabilizes and income growth picks up, the debt-to-income ratio is expected to remain close to its current, still elevated, level,” it says.
“With longer-term interest rates on the rise, we suspect that loan growth will ultimately cool further, helping eventually trim the debt-to-income ratio,” says BMO.
In addition to the household debt news, economists also note that Canadian household net worth rose to a new record high of $7.3 trillion in the quarter, up 0.7% from the previous quarter, as household asset values increased by 0.9%. Per capita net worth was $205,900, which is also an all-time high, notes RBC.
It expects that the Bank of Canada will maintain “considerable monetary policy stimulus” over the near term. “As the economy’s momentum gains strength and labour market conditions improve further, the Bank will begin the process of the ‘normalization of policy interest rates’, with a 25 [basis point] hike in the overnight rate expected in [the third quarter of 2014],” it suggests.