Canadians are becoming wealthier. For the third consecutive quarter, household grew at a reduced pace vis-à-vis assets, which points to an alleviating household debt burden, although consumer debt continues to cause unease.
The chief measure of household debt to disposable income decreased in the first quarter to the fourth quarter by 0.80% - from 162.6% to 162.6% respectively. This decrease signals the first time two consecutive reductions have occurred in the last 12 years.
However, there is still room for concern, as this is a marked contrast to the sub-90% debt burden from the early 1990s; a concern that sparked Finance Minister Jim Flaherty and the Bank of Canada to tighten mortgage rules.
According to TD Bank economist, Diana Petramala, “[f]ollowing several years of rising indebtedness, excesses associated with household debt are finally starting to unwind in a gradual manner.” She continued that “[t]he level of Canadian household debt remains excessive in our view, leaving households vulnerable to an increase in interest rates and/or the unemployment rate. However, the decline in the debt-to-income ratio helps to reduce the risks associated with consumer leverage.”
In conjunction with this data, Statistics Canada released information indicating that the household net worth has climbed to a record $7.2 trillion in the first quarter. As such, on a per capita basis, net worth rose from $201,400 to $204,800 over a quarter, which also marked a record.
The increase in household net worth reflected strength in domestic stock markets, with the S&P/TSX composite index increasing 2.5% in the quarter compared with just 0.90% in the previous quarter.
In my opinion, the net worth of Canadians is benefiting from not only from strong domestic stock performance, but also the impending increase in interest rates. A low interest rate environment results in an acceleration of household borrowing, which in turn affects the debt-to-income ratio, which should please policymakers. However, as many of you know, in a previous article I stated that I do not believe that the debt-to-income ratio is a fair comparison of determining if a nation is on the brink/verge of financial collapse, as in Canada we have a far greater number of essential services that are subsidized by the government (health care being the major one), and since our income taxes are higher, the apparent debt-to-income ratio is a misleading and polarizing figure. Higher interest rates may also have a negative impact on the economy; higher borrowing costs will result in more modest consumer consumption and harm economic growth. The most significant element in this equation is whether the harm to Canadian economic growth, would be enough for the Bank of Canada to halt its tightening of credit markets and modest impending rate increases.
Regardless, if you’re thinking about making a switch, purchasing a home, or refinancing your mortgage, contact your REALTOR® & Mortgage Broker, or feel free to give us a shout, and We’ll be happy to chat.
REALTOR® and Senior Private Loan Specialist - Residential & Commercial
Century 21 Desert Hills Realty and EQ Lending Corp.
Broker/Owner of EQ Lending Corp.