WRAPUP 1-Canadians' credit binge continues, but at slower pace

Thu Dec 13, 2012 11:18am EST

* Debt-to-income ratio hits record high of 165 pct

* Pace of household credit growth slowing

* New home prices rise 0.2 pct in October

* Q3 industrial capacity use unchanged at 80.9 pct

By Louise Egan

OTTAWA, Dec 13 (Reuters) - Canadians continued to pile on personal debt in the third quarter, pushing the debt-to-income ratio to a record high in what has become the biggest headache for central bank chief Mark Carney as he keeps interest rates low to spur growth.

There was evidence, however, that Canadians are curbing their appetite for mortgage credit as the country's housing market cools.

The ratio of credit market debt to disposable income rose to 164.6 from the previous record high of 163.3 in the second quarter as borrowing grew faster than incomes, Statistics Canada said on Thursday.

The trend is similar to that seen in the United States and Britain before the global financial meltdown, and that similarity prompted the government to tighten mortgages rules in July for the fourth time since 2008.

The Bank of Canada said last week that household financial excesses remained the biggest domestic threat to the country's financial system.

But the debt-to-income ratio rose by a smaller amount than it did in the second quarter, Statscan said.

"The further deterioration in household leverage ratios in the third quarter is sure to raise concerns," said David Onyett-Jeffries, economist at Royal Bank of Canada.

"With that said, the annual rate of increase in household debt has shown considerable moderation during 2012, and credit growth is around decade lows at 5.8 percent in the third quarter," he said.

Carney said on Tuesday the pace of household debt accumulation had slowed to about 4 percent from 10 percent, but he said it was too early to call the decrease a sustainable trend.

The central bank sees the debt-to-income ratio continuing to rise before stabilizing over the next couple of years.

Growth in mortgage debt - which accounts for almost two-thirds of all household debt - also slowed somewhat in third quarter but was still up by C$18.4 billion ($18.8 billion) to C$1.1 trillion. Consumer credit rose to C$474 billion from C$467 billion in the second quarter.

NEW HOME PRICES RISE

In another piece of the housing market puzzle, Statscan reported that new home prices rose 0.2 percent in October for the 19th consecutive monthly gain.

The data contrasts with most other reports showing the property market is cooling. Analysts had expected a 0.1 percent rise in the new housing price index.

Prices for new homes in the combined Toronto-Oshawa metropolitan region, which includes Canada's biggest city, rose by 0.3 percent in the month and were up 4.9 percent on the year.

The figures do not include condos, the main area of concern for authorities because of fears of overbuilding.

Canadians have taken advantage of ultra-low borrowing rates to invest in homes and other big-ticket items, helped by the Bank of Canada's benchmark rate holding steady at 1 percent since September 2010.

But the bank has been signaling that its next move will be a rate hike, not a cut, and that the household debt situation will play into its monetary policy decisions.

Economic growth has not been strong enough to warrant monetary tightening and inflation is well below the bank's 2 percent target.

A third Statscan report on Thursday showed Canadian industries operated at 80.9 percent of their production capacity in the third quarter, unchanged from the second quarter, after four consecutive monthly increases.

The central bank watches the data for signs the economy is getting closer to the point where it is generating inflationary pressures. In October, it judged the economy as a whole to be operating at roughly two-thirds of a percent below its capacity and forecast it would return to full capacity at the end of 2013.

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