Canada Household Debt Hits Another Record in Second Quarter

By Paul Vieira Features Dow Jones Newswires

Household debt in Canada rose to another record in the second quarter, as consumers drew down on credit lines or took out loans to buy durable goods such as cars and appliances.

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Meanwhile, mortgage demand dropped in the three-month period.

Borrowing is expected to subside in coming quarters on the heels of two interest-rate increases from the Bank of Canada, and a surge in government of Canada bond yields, which chartered banks tend to use to price their loans for clients.

The ratio of household credit market debt to personal disposable income in the April-to-June period increased to a new high of 167.8% from 166.6% in the previous quarter, Statistics Canada said Friday in its quarterly report on national balance sheets.

That means households, on average, owed 1.68 Canadian dollars ($1.38) 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 -- edged slightly upward from the previous quarter on an unadjusted basis to C$10.55 trillion, or up 0.4%. This marked a steep deceleration in net-worth growth, which the data agency attributed to lower real-estate prices.

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House prices in the Toronto-area market fell in response to measures from regional authorities aimed at targeting speculation in the real-estate market.

On a per capita basis, Canadian net worth in the second quarter was largely unchanged, at C$287,200, from the previous three-month period.

The state of Canadian borrowing, already viewed as a potential risk by policy makers, will be further under the microscope in the coming months after the Bank of Canada raised its benchmark interest rate twice in the past two months, and signaled further rate increases are likely in the offing.

The central bank is responding to strong growth in the first and second quarters of 2017, which has positioned Canada as the top performing economy by a wide margin among the Group of Seven economies.

"Additional policy hikes and the ensuing rise in borrowing rates will put pressure on households to absorb rising costs," economists at Royal Bank of Canada said in a report this month. "The period marked by a voracious appetite for debt accumulation may thus be nearing its end."

The Bank of Canada said in its last interest-rate decision, in which it raised its policy rate by a quarter-percentage point to 1%, that further rate increases would be dependent on incoming economic data -- although adding it pay "close attention" to how indebted households respond to higher borrowing costs.

Central bank data indicate household borrowing rose 5.7% in July from a year ago, and that marked the fastest annual pace of borrowing in nearly six years, according to Royal Bank of Canada.

On a seasonally adjusted basis, households in the first quarter borrowed C$28.87 billion, up from C$25.39 billion in the previous three-month period. Mortgage borrowing fell C$2.6 billion to C$16.54 billion, while demand for consumer credit and nonmortgage loans rose C$6.1 billion to C$12.33 billion.

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

(END) Dow Jones Newswires

September 15, 2017 09:24 ET (13:24 GMT)