Canada’s household debt load took a notable step back from near-record levels in the first quarter of the year, as the trifecta of tougher mortgage rules, rising interest rates and accelerating incomes delivered a dose of relief that policy makers have long been looking for.
Statistics Canada reported on Thursday that the ratio of household credit-market debt to disposable income – the most closely watched measure of Canadians’ debt burden – fell for the second straight quarter to a two-year low of 168 per cent, from 169.7 per cent in the fourth quarter. It was the biggest quarter-to-quarter decline in Statscan’s 28-year record of the measure and comes after Ottawa’s new mortgage-borrowing restrictions went into effect on Jan. 1.
The impact of the new rules – as well as rising mortgage rates as a result of three quarter-percentage-point rate increases by the Bank of Canada since last July, the most recent coming in mid-January – was evident in mortgage borrowing, which declined 13 per cent from the fourth quarter to $13.7-billion, the lowest level in nearly four years. Statscan said the slowdown reflected a 17-per-cent drop in residential resales in the quarter, as the new mortgage rules and higher interest rates took hold. The rise in home prices has also slowed dramatically: The Teranet-National Bank national house price index, released on Wednesday, showed year-over-year growth of a tame 4.5 per cent in May, the slowest pace since the end of 2013.
“Macroprudential measures and the cooling of Canada’s housing market are having the desired effect on household’s balance sheets,” said Robert Hogue, a senior economist at Royal Bank of Canada, in a research report.
Meanwhile, improving growth in Canadians’ paycheques is delivering a boost to the other side of the debt-to-income equation. Statscan said that while overall household debts still crept up 0.3 per cent from the fourth quarter, disposable income rose a brisk 1.3 per cent.
“We may finally be at a turning point,” said Bank of Montreal economic analyst Priscilla Thiagamoorthy in a research note.
“The [Bank of Canada] will look favourably on that shift, even as elevated household debt remains a vulnerability,” she said.
Canada’s high household debt loads have been a concern at the Bank of Canada for years, as it has worried that a sudden economic shock could put a lot of Canadian families in trouble, posing a danger both to the economy and to the country’s financial stability. The central bank’s Financial System Review, a major report released this week, listed household debts as the No. 1 vulnerability to the financial system.
In that report, the Bank of Canada noted that the situation had improved, citing the slowing debt growth and “improvements in credit quality” stemming from the rise in interest rates and the tightening of mortgage regulations. “But even as conditions slowly improve, the sheer size of the outstanding debt means that the vulnerability will likely persist at an elevated level for some time,” it cautioned.
“Developments in the last two quarters are unlikely to change the conversation about household indebtedness in Canada entirely, though they are enough to alter its tone,” Royal Bank’s Mr. Hogue said. “With growth in both mortgage and non-mortgage debt slowing, debt metrics should continue to improve in the near term.”