Canadian household debt-to-income ratio hits record high

Reuters

By David Ljunggren

OTTAWA, Sept 13 (Reuters) - The ratio of household debt toincome in Canada hit a record high in the second quarter,although the pace of growth slowed from the same period in 2012,Statistics Canada said on Friday.

The federal government and the Bank of Canada have expressedconcern that Canadians are taking on too much debt - inparticular cheap mortgages - at a time when interest rates areat near record lows. Officials fret that when rates go upeventually, some consumers could find themselves in trouble.

The ratio of household debt to income rose to 163.4 percentin the second quarter from 162.1 percent in the first quarter. The rise in the ratio followed two consecutive decreases.

Analysts said it was too early to draw conclusions from thelatest data, noting the second quarter is traditionally a busyone for home-buyers. One suggested Canadians could be rushing tobuy property as mortgage rates show signs of rising.

In May, Bank of Canada Governor Stephen Poloz said he sawsigns of a constructive evolution in household debt. The bank,which has held rates steady since September 2010, said last weekit would withdraw stimulus measures at an unspecified time inthe future.

"What the Bank of Canada has described as a 'constructiveevolution' of household balance sheets still appears to beunfolding, but the modest deterioration in the second quarterand the recent pop in home sales raise some doubts," said DougPorter, chief economist at Bank of Montreal.

"The lingering question mark on this front is one reason theBank of Canada has doggedly maintained its mild tighteningbias," he said in a note to clients.

The head of Bank of Nova Scotia said last weekpolicymakers should raise interest rates if they fear a bubbleis forming in Canada's housing market rather than imposing moreregulations on the country's big banks and mortgage lenders.

Canadian authorities have tightened mortgage rules fourtimes since 2008 to cool the housing market, and on Monday,Finance Minister Jim Flaherty said he was comfortable with theway the market had evolved. Flaherty's office did not respond toa request for comment on Friday.

Housing prices climbed to a record high in August, althoughthe annual price increase remained subdued, according to datareleased on Thursday.

The previous record Canadian household debt to income ratiowas 162.8 percent, recorded in the third quarter of 2012.

The ratio in the second quarter increased by 1.3 percentagepoints from the first quarter, or 0.8 percent. In 2012, theequivalent second quarter increase was 1.5 percentage points, or1.0 percent.

RBC Economics economist David Onyett-Jeffries said theincrease in the second-quarter ratio "largely reflected theseasonal bounce in mortgage borrowing in the spring that isassociated with the higher volumes of housing market activityduring the peak home sales season".

Jimmy Jean, strategist at Desjardins Capital Markets, saidthat to some extent the increase in the debt ratio represented"some households rushing home-buying decisions as rates began tomove up".

He added in a note: "The idea of a gradual realignment goingforward thus remains valid and we do not expect the Bank ofCanada to show more concern than in the past."

Mortgage borrowing led the demand for credit in the secondquarter, rising by C$18 billion ($17.4 billion) to a total ofjust over C$1.1 trillion.

National net worth in the second quarter rose 3.1 percent toC$7.31 trillion from the first, as the value of residential realestate helped boost national wealth and net foreign indebtednessdeclined.

Separately, Statscan said Canada's industries operated at80.6 percent of capacity in the second quarter, down slightlyfrom the 80.8 percent recorded in the first quarter.

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