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Canadians’ mortgage debt is on the rise but overall household debt in the country is declining, says Canada’s national statistical agency.
Specifically, Canadian households owed less compared to their income in the first quarter of 2017, but mortgage borrowing continues to trend upwards, according to Statistics Canada’s latest quarterly report on the national balance sheet.
The amount of household credit market debt as a proportion of household disposable income dropped from 167.2 per cent in the last quarter of 2016 to 166.9 per cent in 2017’s first quarter.
In other words, Canadians owed $1.67 in consumer credit, mortgages and non-mortgage loans for every dollar of household disposable income they have.
Total Canadian household net worth hit a record high of $10.5 trillion during this year’s first quarter, up 2.2 per cent from the previous quarter. The increase was driven by a 2.3 per cent increase in financial assets.
Meantime, non-financial assets rose by 7.7 per cent on a year-over-year basis, which reflects the strength of the Canadian real estate market, Statistics Canada notes.
With the Canadian economy gaining momentum this year, TD Economist Diana Petramala writes in a note that this trend should continue for some time.
“Despite a slowdown in housing activity since April of this year, households still have some room to continue to support economic activity through consumer spending and renovation activity amid still low debt servicing costs,” says Petramala.
On a seasonally adjusted basis, Canadian households borrowed $27.5 billion in the first quarter, down slightly from what was recorded in 2016’s fourth quarter.
But mortgage debt increased to $20.9 billion as consumer credit and non-mortgage loan borrowing dropped to $6.5 billion.
In a note published on Wednesday, RBC Economist Laura Cooper says the cost of servicing debt has barely changed in recent years thanks to low interest rates. But if rates were to climb, households’ sensitivity to the hike would likely be greater now than during previous periods of rate increases.
“Now when we look at the mix of household debt, we’re finding that the share of income allocated to the principal payment is higher than interest payments,” Cooper tells BuzzBuzzNews.
“But interest payments are the component that are most sensitive to interest rate increases. We do expect that that will shift, and they’ll spend more of their income on interest,” she adds.
With low inflation and considerable uncertainty surrounding US policy under President Trump’s administration, Cooper says she expects the Bank of Canada will hold off until next year to hike up rates.
That prediction is at odds with what National Bank, Canada’s sixth largest bank, is expecting.
Recently, National Bank forecast the central bank would increase the overnight rate, which influences the mortgage market, by 25 basis points in October.
In the first quarter of 2017, the household debt service ratio increased to 14.2 per cent from 14.1 per cent in the last quarter of 2016.
The ratio expresses the total payments of principal and interest as a proportion of household disposable income.
A period of historically low interest rates has allowed households to make larger mortgage principal payments, according to Statistics Canada
“At the end of the first quarter, the portion that households spent on mortgage principal payments exceeded that spent on mortgage interest payments — the first time this has happened since these statistics were first compiled for the first quarter of 1990,” wrote Statistics Canada.
Last year, national mortgage delinquency rates and the share of mortgages granted to riskier borrowers remained low and stable, according to the Canada Mortgage and Housing Corporation’s (CMHC) note published on Tuesday.
However, borrowers in the Prairies have faced challenges following the collapse in oil prices and the subsequent job losses that ensued.
“Oil dependant regions, notably Calgary and Edmonton, continue to struggle with delinquency rates trending up. In contrast, Vancouver and Toronto continue to record some of the lowest delinquency rates in Canada despite high prices,” writes CMHC.
According to RBC Economics, borrowers in Canada were more than 90 days late on only 0.28 per cent of mortgages in 2016.
Overall, Canadian mortgage debt equalled $1.34 trillion in the first quarter and total consumer credit sat at $593.3 billion.