Canadian debt-to-income ratio declines in Q4

The ratio of Canadian household debt relative to income edged down slightly in the fourth quarter of last year, raising speculation that the growth in debt may have turned a corner.

Statistics Canada said Thursday that household credit market debt as a proportion of household disposable income was 170.4% in the fourth quarter.

In other words, there was $1.70 in credit market debt for every dollar of household disposable income.

Read: Now’s a good time for that debt discussion

That compared with 170.5% in the previous quarter, which was revised down from an earlier reading of 171.1%.

“While it’s too early to tell, we just might have seen the peak in the debt ratio in Q3, as Q1 will no doubt see a sizable decline due to seasonality,” said Benjamin Reitzes, Canadian rates and macro strategist at the Bank of Montreal.

Household debt is often cited as a key risk to the Canadian economy by the Bank of Canada and others.

The central bank, which has raised its benchmark interest three times since last summer, has said it is carefully monitoring the economy’s sensitivity to higher interest rates.

Statistics Canada reported the key ratio crept lower as total household credit market debt, which includes consumer credit, mortgage and non-mortgage loans, increased 1.1% in the fourth quarter to $2.13 trillion. Mortgage debt totalled $1.397 trillion, while consumer credit rose to $630.4 billion.

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Meanwhile, the total household debt service ratio, measured as total obligated payments of principal and interest as a proportion of household disposable income for both mortgage and non-mortgage debt, remained flat at 13.8% in the fourth quarter.

Royal Bank economist Josh Nye said it looks like debt growth is turning a corner.

“With interest rates expected to rise further and housing regulations tightening at the federal and provincial level, the peak in debt growth could very well be behind us,” Nye wrote in a report.

“That should be viewed as a positive development by the Bank of Canada, though progress on reducing the ‘key vulnerability’ of elevated household debt will likely be very slow.”

The drop in the key debt ratio came as the net worth of the household sector increased 2.1% in the fourth quarter to nearly $10.9 trillion.

Statistics Canada said financial assets were the main contributor, growing by $196.6 billion to nearly $6.9 trillion, led by equity and investment funds.

The value of household residential real estate increased by 0.6% in the fourth quarter, after remaining flat in the previous two quarters.

A report from Desjardins says the StatsCan numbers don’t show a real improvement in household indebtedness. “Household credit market debt rose 1.1% in the fourth quarter of 2017, an increase similar to that of household disposable income (+1.2%),” the report said, meaning household debt “remained virtually unchanged.”

Because of rising interest rates, interest payments relative to disposable income “went up from 6.28% to 6.55% in one year,” it said.

The report noted that the restrictions the Office of the Superintendent of Financial Institutions (OSFI) introduced at the start of this year are leading to slower mortgage credit growth. Those rules, combined with rising interest rates, “should lead to some improvement in household debt loads in 2018,” it says, but a “close watch” is required to see how households respond.

The StatsCan report follows one from Equifax Canada earlier in the week that said Canadians’ collective household debt has climbed to $1.8 trillion, marking a 6% increase from a year earlier.

Read: Canadian household debt hits $1.8T, as report warns of domestic risk

The latest report by the Bank of International Settlements said Canada’s credit-to-GDP gap and debt-service ratios have surpassed critical thresholds and are signalling red, pointing to vulnerabilities.