MNI DATA ANALYSIS: Canada Household Debt Peak Could Be Behind

By Yali N'Diaye

     OTTAWA (MNI) - The Bank of Canada has stressed that household debt, due to

its sheer size in Canada, will remain a vulnerability for a long time, just as

it had taken years to reach current levels, but data suggest the peak could be

behind us.

     Data have shown a slowing consumption combined with lower debt and a

decline in mortgage borrowing, a trend, that if confirmed, would raise the bar

on the financial stability front for the BOC to delay policy normalization.     

--CONSUMER CREDIT GROWTH

     The ratio of credit market debt to disposable income edged down to 168.0%

in the first quarter, the lowest in two years, from 169.7% the previous quarter.

     According to the BOC's data, the annualized 3-month percentage change of

consumer credit is now down to 3.3%, from 6.6% in May 2017 and 5.6% at the end

of 2017.

--RESIDENTIAL MORTGAGE CREDIT  

     Over the first quarter, mortgage borrowing decreased C$2.0 billion to

C$13.7 billion, the lowest level since the second quarter 2014, according to

Statistics Canada.

     According to the BOC, the annualized 3-month percentage change of

residential mortgage credit fell to 3.6% as of April, from 6.9% in May 2017, and

5.8% at the end of last year.

     Still, in June 7 remarks following the release of the now annual Financial

System Review, Governor Stephen Poloz said "vigilance" was still needed. First,

the sheer amount of household debt means "it will be with us for a long time". 

     Statistics Canada indeed estimates that household credit market debt

totaled 2.1 trillion in the first quarter, including C$1.4 trillion of mortgage

debt and C$627.5 billion of consumer debt.

     Poloz also stressed it was too early to assess the impact of more stringent

mortgage underwriting standards in place since January.

--CONSUMPTION SLOWING

     Debt-fueled household consumption has also been slowing.

     In the first quarter, household consumption increased 0.3%, its slowest

pace in three years, with a contribution to real GDP growth declining to 0.6

percentage points from 1.2 points in the fourth quarter.

     Household consumption has been consistently slowing since the third quarter

2017 when it was up 0.8% after 1.1% the previous quarter.

     Data Friday from Statistics Canada confirm that consumption cooled down

further in April, although the inclement weather explained part of it. Retail

sales contracted 1.2%, with a 4.3% drop in autos and parts playing a big part.

Excluding the latter, sales were still down 0.1%, with declines across sectors

and provinces. 

--HOUSING 2Q SLOWDOWN  

     Housing activity has been cooling as well. Although the BOC expects resales

to recover in the second quarter, data so far are not validating that

expectation, supporting further mortgage borrowing slowdown.

     Data from the Canadian Real Estate Association show that sales of existing

home have been consistently decreasing since the beginning of this year.

     Although the pace of decline was the largest in January, when the new

underwriting rules came into effect, sales were still down 2.6% in April and

0.1% in May. Sales had been down 13.8% in January, 6.3% in February, and 0.2% in

March.      

--MNI Ottawa Bureau; +1 613 869-0916; email: yali.ndiaye@marketnews.com

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