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Montreal Gazette - June 21, 2011
Canadians fell even deeper in debt in the first quarter of this year, Statistics Canada reported Monday, as they used low interest rates to buy into the housing market, sending household debt to a new record high.
The report showed that household debt has risen to a new record of $1.548 trillion from $1.526 trillion in the previous quarter. On a per-capita basis, the amount rose to $45,000 from $44,500 in the previous quarter.
Also worsening was the capacity of Canadians to handle that debt.
The ratio of household debt to personal disposable income increased to 147.3 per cent between January and March, the federal agency said. That surpassed the previous mark of 146.2 per cent in the fourth quarter of 2010. Household debt includes mortgages, consumer credit and loans.
"The increase in household consumer credit debt slowed in the first quarter, as consumer spending on durable goods fell," the federal agency stated, adding however that "mortgage debt advanced, partly reflecting "relatively stable borrowing costs as well as higher housing resale and renovation activities."
Despite strong warnings last week from the Bank of Canada about rising debt - along with an analysis from the Certified General Accountants Association of Canada saying that the situation is "dire" for some Canadians - Finance Minister Jim Flaherty said Monday he had no plans to tighten mortgage rules again, stressing that the real estate market remains healthy.
"We just took action" in March and activity is already starting to moderate, Flaherty said at a speech in Toronto.
The impact of Canadians' indebtedness is that "households must devote more of their income to paying off debt, leaving less room for saving and consumption," said Diana Petramala, an economist at TD Securities.
"Overall we expect households will continue to cool their pace of borrowing, but household the household balance sheet will remain highly leveraged for sometime. This will thereby constrain consumer spending growth into a range of two to 2.5 per cent over the next three years," Petramala said.
Household net worth also climbed, reaching a new record of $6.37 trillion - or $184,700 per capita in the first quarter, up from $183,300 in the previous three-month period - as the value of homes and equity prices continued to rise in the first quarter.
However, "the growth in credit market debt exceeded that of both assets and new worth," RBC economist David Onyett-Jeffries said in a research note.
As Petramala pointed out, "With a large share of financial assets tied to equity gains, the household balance sheet is likely to suffer a setback in the second given that the S&P/TSX has retreated roughly nine per cent since the end of the quarter."
Douglas Porter, deputy chief economist at BMO Capital Markets, said "Canadian households can't fully resist the lure of interest rates at persistently rock-bottom levels . . . leaving their U.S. counterparts in the rear-view mirror."
But Porter said his bank has been less alarmist that others on the debt buildup, as in many cases, there are solid assets on the other side of the ledger.
Household debt should stabilize once interest rates start to rise in the year ahead, he added
Failing that, "look for Governor Carney to become more vocal in his warnings to households and financial institutions, to potentially push for another round of regulatory moves to curb credit growth, and to possibly raise interest rates more aggressively than he (or the economy) would like."
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