TORONTO – A sustained period of low interest rates has allowed Canadians to rack up record levels of debt which, along with tumbling oil prices, pose a threat to the country’s financial stability, economists say.
The total amount of credit market debt — which includes mortgages, non-mortgage loans and consumer credit — held by Canadian households hit a record high in the third quarter, climbing to 162.6 per cent of disposable income from a revised 161.5 per cent in the second quarter.
That means Canadians owed about $1.63 for every dollar of disposable income, according to the latest figures from Statistics Canada.
“The Bank of Canada has a lot on its plate in terms of assessing risk to the Canadian economy,” Leslie Preston, an economist at TD Economics, said in a note.
“The recent collapse in oil prices (is) likely to have an adverse effect on Canada’s growth over the next year, and particularly on incomes in oil-producing regions,” Preston said. “Now, household debt risks are heating up once again. Overall developments argue for continued caution by the central bank, with interest rate hikes still a ways off in the future.”
The bank’s overnight rate, which generally influences the interest rate charged by lenders for variable rate mortgages and lines of credit, has remained at one per cent for more than four years.
Low interest rates have made carrying a record-high debt burden “more affordable” than ever for Canadians, Preston said. That is evidenced by the fact that even as the ratio of debt to disposable income has ballooned, the debt service ratio — that is, the amount of interest paid on mortgage and non-mortgage debt as a proportion of disposable income — declined to 6.8 per cent in the most recent quarter, a level that Statistics Canada calls an “all-time low.”
The previous record for household debt was set a year ago, in the third quarter of 2013, when the total amount of debt held by Canadians equalled 161.7 per cent of disposable income.
While the extended period of low interest rates has helped buoy the country’s red-hot real estate market, the latest data from the Bank of Canada suggests the accumulation of mortgage debt has settled into a more steady pace, according to RBC economist Laura Cooper. However, non-mortgage loans have picked up some of the slack.
The heavy debt burden being shouldered by Canadian households will reinforce the Bank of Canada’s cautious approach to raising its benchmark interest rate, Cooper said in a note.
“Notably, the Bank of Canada perceives the risk of an unwinding of household imbalances as still low and against a strengthening economic backdrop is expected to raise the overnight rate in small, incremental hikes beginning in mid-2015,” she said.
“We anticipate that while outstanding credit balances will likely rise further, this will be accompanied by steady income gains, resulting in the debt-to-income ratio stabilizing, albeit at elevated levels in upcoming quarters.”
Canadian households borrowed $27.4 billion in the quarter, primarily for mortgages, Statistics Canada said. In total, the country’s household debt burden ticked up 1.5 per cent to $1.805 trillion — a gain roughly on par with the gain in the previous quarter.
Meanwhile, household net worth climbed 1.3 per cent in the quarter, after a 2.2 per cent increase the previous quarter. On a per capita basis, household net worth was $232,200.
However, the recent decline on Canada’s equity markets is likely to cause a decline in household wealth in the fourth quarter, Preston said.
Canada’s stock markets have taken a beating lately as oil prices slipped well over 40 per cent since the summer due to weaker demand, a glut of global supply and a stronger U.S. dollar. That has led to a sell-off in the energy sector, and has also affected other Canadian equities such as the big banks, which are perceived to be dependent on the oil patch for a portion of their revenues.