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

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