Household debt hits new high as country's financial stability questioned

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The debt burden among Canadians has hit a fresh record high as nagging household imbalances begin to feel the pinch of a new problem: Slower income growth.

Debt imbalances are measured chiefly by the ratio of total household credit-market debt (mortgages, other loans and credit cards) to disposable income, and that ratio hit 163.3 per cent in the fourth quarter of last year, up slightly from the previous record 162.7 per cent in the third quarter, Statistics Canada reported Thursday.

The persistent historically high level is an ongoing concern for the Bank of Canada, which has long flagged it as a source of potential risk to the country's economic and financial stability.

Credit-market debt growth actually moderated in the quarter to 1.1 per cent, its slowest pace since the first quarter. But the bigger issue was on the other side of the equation – disposable income, which grew a thin 0.5 per cent, matching its slowest pace in the past six quarters. It was the third straight quarter that disposable-income growth has lagged debt growth.

Economists warn that side of the household ledger will remain under pressure in the coming months, as the damage from the oil shock is expected to take a substantial slice out of incomes.

"A period of softer income growth alongside an upward trend in household credit accumulation will likely keep the debt-to-income ratio elevated over the coming quarters and as a result, the warnings stemming from elevated debt balances – with household indebtedness remaining the key vulnerability to the financial system – are unlikely to subside," Royal Bank of Canada economist Laura Cooper said in a research note.

The Bank of Canada has estimated that if oil prices remain roughly at their current levels, it would shave about 4.5 per cent off gross domestic income by the end of in 2016.

If debt were to hold steady, that income loss would result in a rise in the debt-to-disposable-income ratio of about 4 percentage points, the central bank said in its quarterly Monetary Policy Report in January.

"While some regions will clearly bear more of the brunt than others, the impact will be felt across the country," Bank of Canada senior deputy governor Carolyn Wilkins said in a speech last month.

"Nearly one-third of the goods and services purchased by the Alberta energy industry are drawn from other provinces – and so are the workers," Ms. Wilkins said.

However, economists point out that other key measures of the debt burden looked less onerous in the fourth quarter.

The ratio of household credit-market debt to net worth held steady at 21.9 per cent, near a six-year low, as the national net worth rose 2.6 per cent in the quarter, to a record $8.27-trillion. The ratio of debt to total assets was also steady at 18.2 per cent, also near a six-year low.

And the debt-service ratio – defined as interest payments as a proportion of disposable income – held at 6.8 per cent, a near-record low, reflecting historically low interest rates on mortgages and other loans.

Household net worth rose 7.5 per cent in 2014 as a whole, spurred by rising values in both real estate and financial-market assets. Per-capita household net worth ended the year at $233,000.

"Despite the acceleration in household debt, Canadian households, on average, are still in a good position to keep up with their debt payments," said Toronto-Dominion Bank economist Diana Petramala.

In a research report Thursday, Bank of Montreal economists Douglas Porter and Benjamin Reitzes argued that much of the hand-wringing over the rise in Canadian household debt has largely ignored the fact that household savings, in broad terms, have grown dramatically at the same time.

They noted that household net financial assets – all cash, deposits, bonds, stocks, life insurance and pension assets, after subtracting household debt – have nearly doubled since the depths of the financial crisis, to $3.7-trillion.

Household debt, over the same period, has risen by 38 per cent, to $1.82-trillion. That works out to an extra $104,000 per Canadian in financial assets, over and above their debts.

And if you take into account non-financial assets – chiefly, residential real estate – Canadian households' total net worth is 4.5 times greater than their total debt, Mr. Porter and Mr. Reitzes said.

"No doubt, Canadian household finances are now vulnerable to a serious shock (such as a sudden back-up in interest rates and/or broader economic weakness), so any flattening in household debt growth would be welcome," they concluded.

"Still, the singular focus on debt portrays an overly negative picture of Canadian household finances, which have proven incredibly resilient this cycle and likely still have enough cushion to provide a soft landing for spending in the year ahead."

Meanwhile, the latest data on Canadian residential real estate suggested that Canada's overheated housing market is continuing its slow, gradual cooling.

The closely watched Teranet-National Bank National Composite House Price Index showed that year-over-year price growth slowed to 4.4 per cent in February from 4.7 per cent in January, its fourth consecutive decline.

On a month-to-month basis, prices edged up 0.1 per cent, but only three of the 11 urban markets in the index showed increases.

Not surprisingly, Calgary – the market at the epicentre of the oil shock – fell 0.6 per cent, its fourth consecutive monthly drop, bringing cumulative price declines for the city to 2.3 per cent over that period.