Household debt-to-disposable-income ratio edges lower as income rises

OTTAWA – The ratio of how much Canadians owe compared with how much they earn improved in the first quarter for the first time since steadily worsening through most of last year.

But economists said the improvement was tiny and would do little to change the Bank of Canada’s view that high household debt continues to be a key risk to the economy.

“Growth in personal disposable income can be quite volatile on a quarter-to-quarter basis, and the very slight decline in the ratio really looks more like a plateau than the beginning of a trend decline,” TD Bank economist Leslie Preston wrote in a note.

“Moreover, lower interest rates have led to Canada’s housing market heating up this spring, which will likely lead to an acceleration in debt growth in the second quarter.”

Statistics Canada said Friday that ratio of household debt to disposable income edged down 163.3 per cent for the first three months of the year from 163.6 per cent at the end of last year.

That means households owed about $1.63 in consumer credit, mortgage and non-mortgage loans for every dollar of disposable income.

The slight improvement came as disposable income growth outpaced borrowing by rising 0.9 per cent compared with 0.7 per cent for household credit market debt.

BMO senior economist Benjamin Reitzes said the size of the improvement in the ratio was a bit of a disappointment.

“The ratio fell in first quarter for the sixth consecutive year, but the average drop in the prior five years was 0.9 percentage points,” Reitzes said.

Low interest rates have made it easier for Canadians to borrow, contributing to the rise in debt in recent years. However, many have raised concerns about what will happen when interest rates and the cost of borrowing start to rise again.

The Bank of Canada listed household debt and the persistently overvalued real estate market as key vulnerabilities in its financial system review earlier this week.

Total household credit market debt reached $1.841 trillion at the end of the first quarter, up 0.7 per cent from the previous quarter. Consumer credit debt was $519.5 billion, while mortgage debt stood at $1.197 trillion.

However, even with the increase, data looking at the ability of Canadians to handle the debt improved with both the debt-to-asset and debt-to-net worth ratios lower.

Statistics Canada said household net worth rose 3.4 per cent in the first quarter, boosted by gains in real estate and financial assets such as mutual funds and pension assets.

Non-financial assets, primarily real estate, rose 1.2 per cent while net financial assets were up 6.2 per cent.

Household net worth rose 3.2 per cent to $241,800 per capita.