UPDATE 2-Canada household debt/income ratio continues to edge lower

(Corrects figure in 11th paragraph to C$550 billion from C$550 million)

* Ratio 163.2 pct in Q1 and 163.9 pct in Q4

* Ratio hit a record 164.1 pct in Q3; rose through recession

* Officials see soft landing for housing and household debt

By Randall Palmer

OTTAWA, June 19 (Reuters) - The ratio of Canadian household debt to income edged down further in the first quarter from the record high it hit last year, buttressing policymakers' expectations that a soft landing is in store for the housing market and family indebtedness.

Statistics Canada reported on Thursday a ratio of 163.2 percent in the first quarter. The ratio reached a record high of 164.1 percent in the third quarter of last year, and dipped to 163.9 percent in the fourth quarter.

In relative terms, the decline in the first quarter was tiny for a measure that jumped from 108.5 percent in early 2000 to 129.2 percent in 2006, and then rose inexorably in the following years as Canada avoided the real estate crash that afflicted the United States.

Finance Minister Joe Oliver and Bank of Canada Governor Stephen Poloz have been watching the housing market and household debt levels for signs that consumers are being overstretched but they have been relatively sanguine about recent trends.

Oliver said this week he expected a soft landing in the housing market. The Bank of Canada said last Thursday it continued to see "a constructive evolution in housing market imbalances and household credit".

The bank said, however, that household debt and overvalued housing remain the financial system's biggest vulnerability, with housing valuations stretched and overbuilding in some parts of the market.

Economists cautioned that the debt-income ratio is not seasonally adjusted. It typically declines in the first quarter as households pay off Christmas purchases and hold off buying homes until spring and summer.

"Still, today's broad results are a tantalizing hint that the corner is turning for household debt, and lend support to the Bank of Canada's view that imbalances are evolving 'constructively'," said Bank of Montreal chief economist Doug Porter.

"Gathering signs that debt is close to stabilizing suggest that the bank can focus more on supporting growth (i.e. staying dovish) and less on guarding against too-rapid household debt growth (i.e. talking hawkish)."

With interest rates very low, the debt-servicing ratio was at a historic low of 6.97 percent in the first quarter on a seasonally adjusted annual basis. That ratio, of course, would rise if interest rates rose.

Stepping back further, however, Capital Economics' Canada economist David Madani pointed to housing inflation. The value of Canadian residential property has tripled to a record C$3.8 trillion ($3.5 trillion) this year from C$1.3 trillion in 2000. Only C$550 billion of that is from renovation and new home building. The rest is pure inflation.

Canadian households remain dangerously exposed to rate hikes, he said. "Furthermore, should house prices drop back, as we fear over the next few years, then the resulting decline in household net worth would act as a significant constraint on consumer spending."

Statistics Canada officials said the ratio of household debt to income in the United States, which has been deleveraging since the subprime market crash, was 136.6 percent in the first quarter but that the numbers cover slightly different data. They said the closest approximation to the U.S. ratio would put Canada's at 160.2 percent.

($1=$1.08 Canadian) (Reporting by Randall Palmer; Editing by Chizu Nomiyama; and Peter Galloway)