Canadian household debt-to-income ratio hits record high in third quarter

OTTAWA (Reuters) - Canadian household debt compared to income rose to a record in the third quarter as borrowing outpaced growth in disposable income, while home prices continued to climb in November, led by hot west coast markets.

A condominium construction site is seen in Toronto, March 11, 2014. REUTERS/Aaron Harris

The ratio of household credit market debt to income rose to 163.7 percent in the third quarter from a downwardly revised 162.7 percent in the second quarter, Statistics Canada said on Monday.

The Bank of Canada, which has cut interest rates twice this year to offset the shock of cheap oil on the resource-oriented economy, has warned of rising vulnerabilities in the household sector as Canadians have taken advantage of years of low borrowing costs.

Still, as the central bank also sees overall risks to financial stability evolving as expected, the figures are unlikely to dictate the bank’s policy, said Doug Porter, chief economist at BMO Capital Markets.

The Bank of Canada will release its latest financial system review on Tuesday.

The rising debt levels have led some to worry that consumers have taken on more than they can handle, particularly in the housing market where prices have soared.

Household credit market debt, which includes consumer credit, mortgages and other loans, rose 1.4 percent last quarter with the bigger increase coming from mortgages. Separate data showed home priced edged up 0.2 percent in November.

The government took steps last week to cool parts of the housing market by forcing people who want to buy more expensive homes to provide a bigger down payment.

“The timing of those moves may have been at least partly driven by the dawning realization that not only will the Bank of Canada not move to dampen housing with rate hikes anytime soon, there is the very real risk that they could fuel it further with yet more rate cuts,” Porter said, pointing to the slump in oil prices thanks to a global glut and waning demand.

Although experts have warned it could be painful for consumers when rates eventually rise, it was cheaper for Canadians to carry their loans in the third quarter as the interest-only debt service ratio reached a record low of 6.1 percent.

November’s increase in home prices was the eleventh consecutive monthly gain, driven by a 1.3 percent gain in Vancouver and a 1.8 percent climb in Victoria, British Columbia, according to the Teranet-National Bank Composite House Price Index.

The new mortgage regulations should “at least mildly dampen the piping hot” markets in Vancouver and Toronto, Porter said.

Additional reporting by Andrea Hopkins in Toronto; Editing by Bill Trottn and James Dalgleish