Canadian households keep getting wealthier and the good news is that growth of asset values has outpaced that of credit—a positive turn of events for the watchful eyes of policymakers.
The often-watched ratios of credit market debt-to-income and debt service have moved lower.
National balance sheet accounts data released by Statistics Canada March 14 showed the market value of all Canadian households rose by 3.0 percent in the fourth quarter of 2013 to $7.7 trillion, representing a new record. Household net worth was boosted by a 1.6 percent gain in real estate while mortgage debt was up 1.1 percent.
Canada’s policymakers are concerned with, among other things, elevated leverage in the financial system. The credit market debt-to-disposable income ratio is one such measure of leverage. And despite the mounting net worth, this measure edged only slightly lower to 164.0 percent in the fourth quarter of 2013, from 164.2 percent in the third quarter.
This ratio appears to be stabilizing but is still at an elevated level, and worries about its absolute level remain intact. Furthermore, when compared on a similar basis to that used in the U.S., Canadians are actually more leveraged than Americans and Brits.
The debt service ratio (mortgage and non-mortgage interest paid divided by disposable income) moved to a record low of 7.06 percent.
Canadian borrowers aren’t exactly struggling to make their mortgage payments. In a report published March 11, Bank of America Merrill Lynch added their voice to the many that say Canada’s housing sector is not in bubble territory.
According to the Canadian Association of Accredited Mortgage Professionals (CAAMP), 38 percent of households engaged in some action in 2013 to pay off their mortgages faster (lump sum payments or payment acceleration.)
The reality is Canadians are adding to their indebtedness at the slowest pace since 2001. Statistics Canada points out that the average quarterly growth in mortgage debt as well as consumer credit debt were both higher at 2.5 percent from 2002 to 2007. These days, the average quarterly growth in mortgage debt and consumer credit debt is running at 1.8 percent and 1.3 percent respectively.
The slower growth in mortgage debt indicates a cooling in demand for housing, while a moderation in credit growth is firmly underway. The risks to financial stability in Canada have not increased with the new data on household balances and the evolution of credit.
“Our scenario continues to call for a gradual slowing of the real estate market in 2014. Therefore it should only be a question of time before mortgage credit growth slows, thereby making room for real improvement in the household debt ratio,” stated Desjardins in a research report published March 14.