Canada Household Debt Levels Climb Higher--Update

By Paul Vieira Features Dow Jones Newswires

Household debt in Canada rose to a fresh record in the third quarter, likely fueling increased concern about consumers' ability to handle higher rates. Meanwhile, net worth on a per capita basis fell.

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The ratio of household credit market debt to personal disposable income in the third quarter climbed to 171.1% from a revised 170.1% in the previous quarter, Statistics Canada said Thursday in its quarterly report on national balance sheets. That means households, on average, owed 1.71 Canadian dollars (US$1.33) for every dollar of after-tax income earned.

The previous second-quarter estimate had the ratio of debt to after-tax income at 167.8%. Statistics Canada said data have been revised back to 1990, and have been adjusted to incorporate a "significant" downward change in after-tax income for 2016. The changes were made after reviewing documents made available by Canada's tax-collection agency.

As a result, the second quarter this year marked the first time the closely watched debt-to-disposable income ratio cracked the 170% threshold.

Statistics Canada said total household credit-market debt rose 1.4% in the quarter, to C$2.11 trillion. The agency added that on an unadjusted basis, after-tax income rose 0.8% in the third quarter from the previous three-month period.

Canada's household debt levels have surged this century, fueled by an extended period of rock-bottom interest rates, and are among the highest on an adjusted basis among members of the Organization for Economic Cooperation and Development. Canada recovered faster than other major industrialized economies following the 2008-09 global recession, as its financial system didn't require a bailout and commodity prices rose.

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As a share of U.S. economic output, household debt in America was about 66% in the third quarter versus a high of around 87% in early 2009, according to data from the Federal Reserve Bank of New York. Total household debt in the U.S. totaled $12.96 trillion, up 0.9% from the previous quarter, or the most on record on an unadjusted basis.

National net worth -- which combines the value of nonfinancial assets with Canada's net foreign asset position -- edged upward 0.1% on an unadjusted basis to C$10.86 trillion. On a per capita basis, Canadian net worth in the third quarter fell 0.4% to C$294,500. Net worth took a hit based on weaker house prices, as measures aimed at cooling speculative behavior in the greater Toronto area kick in.

Royal Bank of Canada economist Josh Nye said that relative to assets and net worth, debt also edged higher but those ratios are much closer to longer run levels. Mr. Nye, though, said households will "remain stuck with high-debt loads, keeping financial system vulnerabilities elevated in the years to come."

Even in anticipation of another rise in household debt, economists at BMO Capital Markets said Canadian balance sheets remain in decent shape despite persistent worries over debt burdens. "The question now is: how sensitive are households to higher rates?," the economists said in a note to clients.

The debt buildup is expected to weigh on Canadian economic activity. John Manley, head of the Business Council of Canada -- which represents chief executives from blue-chip companies -- said in a letter to Finance Minister Bill Morneau that business leaders expect higher borrowing costs and excessive debt levels to constrain consumer spending over the next two years.

Bank of Canada data indicate total household borrowing rose 5.5% in October on a one-year basis, with more than 70% of the borrowing linked to mortgages.

Last month, the Bank of Canada said in a semiannual report that policy measures meant to damp real-estate speculation and excessive borrowing, along with an improving economy, are helping contain vulnerabilities within the country's financial system.

After two rate rises earlier this year, the Bank of Canada has turned cautious, with market watchers now expecting fewer rate increases in 2018 than previously anticipated. The central bank has voiced concern over how households will respond to higher borrowing costs, the low level of inflation and the uncertainty posed by talks to revamp the North American Free Trade Agreement.

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

(END) Dow Jones Newswires

December 14, 2017 10:54 ET (15:54 GMT)