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Household debt ratio grew in Q2 as debt increased faster than income

OTTAWA – The amount owed by Canadians compared with their paycheques hit yet another record in the second quarter as households increased the amount they borrowed faster than incomes rose.

Statistics Canada said Friday that the ratio of household credit market debt to disposable income climbed to 164.6 per cent from 163.0 per cent in the first quarter.

That means Canadians owed nearly $1.65 in consumer credit and mortgage and non-mortgage loans for every dollar of disposable income.

The increase came as total household credit market debt grew by 1.8 per cent in the quarter while disposable income grew 0.8 per cent over the same period.

Bank of Montreal senior economist Benjamin Reitzes said hot housing markets in British Columbia and Ontario are pushing mortgage growth, despite softness in oil-producing regions.

“Canadians are just responding to the incentives that are out there,” said Reitzes, pointing to the low interest rates being offering to borrowers.

“Low rates make you want to borrow more, which mean you can afford to borrow more, and people do.”

The Bank of Canada has cut its key interest rate twice this year, and while the country’s big banks have passed on only a portion of the central bank reduction on to consumers, lending rates have come down.

The increased debt has been identified as a point of vulnerability, but in cutting its rate in July the central bank focused on the risks to the economy caused by the drop in oil prices and on preventing a widespread economic downturn.

Reitzes noted the household debt service ratio, which measures the amount of interest and principal as a share of disposable income, increased 0.2 percentage points to 14.1 per cent.

However, he said interest payments as a share of disposable income hit a record low at 6.37 per cent in the quarter.

TD Bank economist Jonathan Bendiner noted that growth in mortgages has been the main factor in increasing household debt.

“Looking ahead, while our forecast for decent economic growth over the second half of this year will boost incomes, it will still likely be outstripped by debt growth,” Bendiner wrote in a report.

“As such, we expect the household debt-to-income ratio to trend up over the second half of 2015 before stabilizing in 2016 along with a moderation in housing activity.”

Overall, total household credit market debt amounted to $1.874 trillion at the end of the second quarter.

Household net worth increased 0.9 per cent in the second quarter as non-financial assets, primarily real estate, rose 1.8 per cent while net financial assets edged down 0.1 per cent.

On a per capita basis, household net worth increased to $243,800.