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Canadian household debt hits new high
 October 20 2012     Posted by


Figures released by Statistics Canada Monday suggest Canadian households are more financially vulnerable than previously thought.

The ratio of credit market household debt to disposable income hit 163.4 per cent in the second quarter, up from 161.8 per cent in the previous period, the agency said.

Credit market debt strips out trade accounts payable, or short-term credit — normally interest free in order to encourage commerce — that suppliers extend to small businesses, including home businesses.

That number is also about where households in the United States and the United Kingdom stood before home values crashed.

“Today’s report indicates that Canadian households are more financially vulnerable than had previously been thought,” said TD economist Diana Petramala in a commentary.

That's because even though Canadians hold more assets than their counterparts in the U.S. and the U.K. did before the crash, most of those assets are locked into the value of their homes, which could take a tumble in a housing correction or if the economy tanks.

“Overall, this supports our bearish view that Canada's housing boom is unsustainable and the eventual correction, which we think is already underway, is likely to have material negative implications for growth in the broader domestic economy,” Capital Economics said in a note.

At the peak of the U.S. housing bubble in 2007, household debt to income there hit a high of 170 per cent.

Mortgage rules tightened

Still, analysts caution that Canada's housing market is on a more solid footing than was the case south of the border.

Canadians tend to hold more equity in their homes and many of their mortgages are backed by the federal government through the Canada Mortgage and Housing Corp. As well, risky subprime mortgages represent a small percentage of lending.

Ottawa has moved four times in as many years to tighten mortgage rules to keep marginal buyers out of the market, most recently in August.

The latest change, which added to monthly payments on insured, first-time purchases, has been partially credited with a recent slowing in home resales, particularly in previously hot markets of Vancouver and Toronto, and with a moderation in prices.

Finance Minister Jim Flaherty, Bank of Canada governor Mark Carney and various economists have warned Canadians that they should keep their debt to levels they can still manage when interest rates eventually rise from their current record lows.

The Bank of Canada has kept its key overnight lending rate at one per cent for more than two years, and Carney has warned that it will have to rise at some point.

The StatsCan report revised the numbers for the debt-to-income ratio going back as far as 1990. That revision lowered national net worth by $6.4 billion, or roughly $2,000 per person, based both on a higher estimate of debt and a lower evaluation of disposable income.

Before the changes, the agency estimated that the total debt to income ratio was 152 per cent in the second quarter.


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