Canadian Household Debt Dips in First Quarter

By Paul Vieira Features Dow Jones Newswires

Household debt in Canada fell slightly in the first quarter from a record high, Statistics Canada said Wednesday, but remains at a level that prompted the country's central bank to warn it poses a threat to financial stability.

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The ratio of household credit market debt to personal disposable income in the January-to-March period declined to 166.9% from 167.2% in the previous quarter, the data agency said in its quarterly report on national balance sheets. That means households, on average, owed 1.67 Canadian dollars ($1.26) for every dollar of after-tax income earned.

National net worth -- which combines the value of nonfinancial assets with Canada's net foreign asset position -- climbed 2.6% in the quarter on an unadjusted basis, to C$10.51 trillion, on the strength of higher house and commodity prices. On a per capita basis, Canadian net worth rose to C$287,000 in the first quarter from C$280,600 in the final three months of 2016.

With Canada's national-balance sheet data, the focus tends to largely be on household-debt readings. The Bank of Canada said last week rising household debt and frothy real-estate markets remain the top concerns for financial stability in the country, with conditions exacerbated in the past six months by significant house-price gains in Toronto and the surrounding area.

The central bank, in its financial-stability review, said borrowing -- the bulk in mortgages and drawdowns on home-equity lines of credit -- has climbed at a roughly 6% pace from a year ago in recent months, or well above wage gains.

Research from Royal Bank of Canada suggests interest payments for consumer credit -- in the form of lines of credit and auto loans -- are equal to the total interest paid on mortgages. Because this debt tends to be tied to variable rates, any increase in interest rates could leave households exposed, RBC said. In recent days, the Bank of Canada has signaled it is prepared to raise rates on stronger and broader economic activity, with Gov. Stephen Poloz saying rate cuts it delivered in 2015 amid the oil-price shock "have done their work."

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The overnight-index swap market is now pricing in a greater than 60% likelihood of a Bank of Canada rate increase in October, according to TD Securities.

The RBC research also indicated one-third of Canadian households are debt free and 25% owed less than C$25,000. Mortgage delinquencies are also low, at 0.32% as of the end of the first quarter.

On a seasonally-adjusted basis, households in the first quarter borrowed C$27.47 billion, down from C$27.62 billion in the previous three-month period.

On an unadjusted basis, the data agency said the ratio of total household credit-market debt to gross domestic product fell to 99.5% in the first quarter from 100% in the previous quarter. Total household-credit market debt reached C$2.04 trillion as of March 31, and mortgages made up nearly two thirds of all borrowing.

The data agency noted the first quarter marked the first time since it first began collecting these figures that the portion households spend on mortgage principal payments exceeded mortgage-interest payments. This is due to the prevalence of historically low interest rates since 2008, or when the financial crisis hit the global economy.

Write to Paul Vieira at paul.vieira@wsj.com

(END) Dow Jones Newswires

June 14, 2017 09:13 ET (13:13 GMT)