Photo: James Bombales
Although Canadian household debt growth has slowed in recent months, elevated levels will continue to impact the throughout 2018, says an economist from one of Canada’s largest banks.
“Our expectation is that we’ll see slower debt growth over the next couple of years, but we’re still talking about growing debt — just not growing at the same pace that we’ve seen in the last couple of years,” RBC economist Josh Nye tells BuzzBuzzNews.
According to Nye, the peak in debt growth could be behind us with the stricter regulations at the provincial and federal levels now governing the housing market, along with further potential interest rate hikes this year.
Housing Market News Alerts
Sign up now for news alerts on the Canadian housing market
“It does look like household credit growth is slowing. We think 2018 is going to be a bit more of an interesting year in that aspect because you have rising rates, you’ve got all of these big changes in housing policy [and] that’s sort of layering on top one another,” says Nye.
In the fourth quarter of 2017, the household debt-to-disposable income ratio was 170.4 per cent — little unchanged from the previous quarter’s record high of 170.5 per cent, according to a note published by Nye on Thursday.
Meantime, credit market debt rose one per cent as both mortgage and non-mortgage debt increased at a similar pace.
The economist notes that mortgage credit growth is starting to slow and rising interest rates, along with other housing policy, will reinforce that trend.
Although more moderate debt growth is a step in the right direction as far as the Bank of Canada is concerned, Nye warns that policymakers shouldn’t be “hitting the brakes too hard.”
He is referring to the impact that higher rates had on household debt service costs in the fourth quarter of 2017, and how a trend of gradually rising interest payments will be a headwind for consumer spending this year.
“Basically we’re in uncharted territory in terms of raising interest rates with debt at these levels. I think they [the Bank of Canada] want to be cautious in raising rates because they don’t know how much tightening they’re going to get from each rate hike,” says Nye.
Along with mortgage credit, Nye expects consumer credit to be impacted by rate hikes — making big ticket purchases less attractive for consumers.
In the long run, Nye is quick to point out that the country will be faced with high debt levels for a number of years, but is hopeful that the debt-to-income ratio will start to level off.
“It’s going to be what the Bank of Canada calls ‘a key vulnerability’ facing our financial system, that’s going to be around for quite awhile,” says Nye.