The indebtedness of Canadians moderated in 2013 unlike any other year in recent history, supporting the view that there are bigger risks to the economy for policymakers to address.
Without risks, there are fewer “rewards,” and this means the Canadian economy will have to look away from household spending to spur growth.
Residential mortgage credit grew at the slowest pace since 2000, according to a report by Royal Bank of Canada released at the end of January.
While the “soft landing” talked about in Canada’s residential real estate market is thought to relate more closely to house prices and housing starts, the moderation in mortgage credit also supports this thesis. The stock of mortgage debt in Canada rose only 4.8 percent between the end of 2012 and the end of 2013.
Household credit in Canada for 2013 also grew at a very slow pace—the slowest pace since 1995. RBC reports that outstanding balances of household credit increased by only 3.9 percent over the 12 months ending in December.
That 3.9 percent was 6.3 percent over the 12 months ending December 2012, clearly showing the moderation.
The indebtedness of Canadian households has long been a financial stability concern to policymakers. With restrictions on mortgage financing having been enacted in the summer of 2012 to control excessive froth in the housing market, the fruits of that labour continue to be seen.
Last October, the Bank of Canada stated in its Monetary Policy Report (MPR), “The third important domestic risk remains a disorderly unwinding of household sector imbalances, which are still elevated.”
The Bank later went on to say, “The Bank must also take into consideration the risk of exacerbating already-elevated household imbalances.”
More recently, however, the focus for governor Stephen Poloz has been inflation. With respect to the housing sector, the January MPR stated, “Recent data have been consistent with the Bank’s expectation of a soft landing in the housing market and a stabilization of household indebtedness relative to income.”
“Households scaling back on borrowing helps to allay concerns surrounding the exacerbation of elevated risks posed by record-high levels of household indebtedness,” according to RBC.
With the Bank of Canada not expected to increase rates in 2014, the question will be if the recent lowering of mortgage rates will spur an increase in debt and reverse the 2013 trend as 2014 takes shape.
The average five-year fixed rate mortgage from the big six banks averaged 3.92 percent as of Feb. 4. This is approximately 0.2 percent lower than late last year.