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MNI ANALYSIS: Household Debt Remains Threat To Outlook

By Yali N'Diaye
     OTTAWA (MNI) - The Bank of Canada's cautious approach to the normalization
process stems in part from the elevated household debt that makes the current
economic cycle particularly sensitive to interest rate hikes, even as data
suggest debt could be stabilizing.
     The BOC said in its March 7 policy statement that while it continues to
monitor the economy's response to higher rates, "household credit growth has
decelerated for three consecutive months."
     The central left its overnight rate target unchanged at 1.25% on March 7,
after having raised it three times since July 2017 by a cumulative 75 basis
points, but still sees the case for more hikes. The timing and scope remains
data-dependent, with a close eye on the economy's sensitivity to higher rates.
     --STABILIZING DEBT
     Statistics Canada reported Thursday that credit market-to-disposable income
was little changed in the fourth quarter 2017 at 170.4% from 170.5% the previous
quarter.
     Total household credit market debt - consumer credit, mortgage and
non-mortgage loans - reached C$2.1 trillion, including C$1.4 trillion for
mortgage debt.
     And mortgage borrowing increased 4.1%, for the first time after five
quarters of declines.
     That being said, with housing sales having moved forward at the end of last
year in anticipation of tighter mortgage rules in effect since January 2018,
higher mortgage borrowing could be explained by this factor in the fourth
quarter.
     As a result, the BOC will likely want to wait and see more data on that
front.
     --STILL THREATENS OUTLOOK
     At 170.4%, household debt-to-disposable income remains high, making it
likely to remain a concern for the BOC and keep the central bank on the cautious
side, especially as higher interest rates are combined with tighter macro
prudential rules.
     In fact, a staff analytical paper Wednesday stressed the "asymmetric risks
to the economic outlook" stemming from financial vulnerabilities, key of them
elevated household debt and housing market imbalances.
     "Uncertainty on the profile of consumption by indebted households - and,
therefore, risks to growth in gross domestic product (GDP) - arises from higher
interest rates" and tighter mortgage underwriting rules in effect since January
1, the paper said.
     So far, the BOC expects higher rates to have a "gradual" impact on
households due to the fixed nature of their payments for several years.
     However, Thursday's data and the BOC's own research suggest household debt
is a downside risk that is here to stay.
     --RATING AGENCIES CONCERNED
     In fact, Moody's said Tuesday that Canadian banks face a risk from rising
consumer debt vulnerability.
     And it is not just related to stretched housing prices in markets such as
Toronto and Vancouver.
     "The strong credit quality of Canadian consumer loans, thanks largely to
record low unemployment in recent years, is under threat on several fronts:
debt-servicing costs are increasing because of interest rate hikes, the
proportion of riskier uninsured mortgages is on the rise, and longer auto loan
terms point to greater borrower vulnerability," Moody's AVP Jason Mercer said.
     In February, S&P Global raised the economic risk for Canada's banks due to
elevated housing prices and household debt, as well as mortgage fraud.
     "We believe that structural shifts in the RM origination process in Canada,
in particular the growing share of RMs originated via brokers, compound the
risks of high household debt and house prices because we believe brokers
generally have less incentive than lenders to guard against fraud," the rating
agency said.
--MNI Ottawa Bureau; +1 613 869-0916; email: yali.ndiaye@marketnews.com
[TOPICS: M$C$$$,MX$$$$]

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