Canadian Household Debt Increased Q4 2011; Assets Up Even More
--Debt-Income Ratio Edges Down
OTTAWA (MNI) - Canadian household debt levels have raised concern at the Bank of Canada and in the government, but even as they increased further in the fourth quarter, assets rose at a higher rate, easing the debt-to-income ratio a bit, and private analysts show little concern for now.
Household debt increased by C$20 billion in the fourth quarter last year but their asset values by C$80 billion, according the National Balance Sheet Accounts Statistics Canada released Thursday.
The key marker often cited, the seasonally adjusted credit market debt-to-income ratio, subsided slightly to 150.6% from 152% in the third quarter. The slight decline is from a lengthy move upwards: it was 142% as recently as the second quarter of 2010.
Household net worth rose by 0.9% or C$59 billion in the fourth quarter to C$6.31 trillion, retracing part of the third quarter's 2.3% (C$150 billion) decline because of financial market retrenchment. Per capita net worth was C$182,100 in the quarter, up from $180,600 in the previous quarter but still not matching the C$185,600 of the second quarter or C$186,900 of the first, according to the report.
Dawn Desjardins, assistant chief economist at RBC Economics, wrote to clients that the accounts show Canadian households adding to their debt burdens but that "the pace of household credit growth remains firmly on a moderating trend." She said the 6.0% year-over-year increase in the debt level represents "the slowest pace of debt accumulation since early 2002."
Desjardins said "for now, the rise in asset values and low interest rates are insulating households from any negative fallout from the elevated debt levels." The Bank of Canada last week maintained its policy interest rate at 1.0%, she noted, "with a neutral bias and no indication that any changes are in the offing."
Avery Shenfeld, chief economist of CIBC World Markets, was less sanguine in an interview with MNI, saying there was "a little bit of a drop in debt relative to income," he said, "but you can't make too much out of one quarter's performance."
There still is concern about Canadians "chasing rising house prices by taking out mortgages" that have low rates now but contain built-in problems down the road as rates rise, he said.
Shenfeld noted that in existing home resale data also out Thursday, house prices continued to climb.
"We don't see Canadians defaulting on their debts or getting behind in their payments now, but are more concerned about four or five years down the road," he said, but cautioned that it is important not to have too large a debt burden built up for the day when mortgage rates rise.
The two economists from two of Canada's largest national banks were commenting as their own institutions were in a mortgage price war which rages now. The Bank of Montreal last week brought in five-year fixed-rate mortgages at 2.99% and 10-year mortgages at 3.99%, and this week the rival banks followed with very similar come-ons.
All of this comes at a time when the Bank of Canada and Finance Minister Jim Flaherty are warning that rising household debt levels are the biggest domestic economic risks for what Flaherty terms "a fragile economy." Flaherty at the same time repeats and repeats that Canada has one of the strongest economies in the industrialized world.
Diana Petramala, economist at TD Economics, agrees there is reason to be concerned, saying that "at 150.6%, household indebtedness remains excessive" and that it likely will climb higher again.
In a report she cited "the combination of soft labour markets and expected modest economic growth." Households would be expected to continue moderating their spending but that "borrowing is still likely to grow at a faster clip than income."
The total value of household assets rose by C$80 billion (1.0%) in the fourth quarter to C$7.9 trillion as financial asset values (cash, equities, bonds, and pensions) regained some of past stock market weakness.
Desjardins said noted that non-financial assets, 87% of which are real estate values, "rose a more modest 0.5% (C$18 billion) relative to the third quarter of 2011 as Canada's housing market strength continued to support real estate values."
** MNI - Ottawa **