Canadian households have more net worth but also a troubling level of household debt, data from Statistics Canada indicates.
Net worth rose by $101.4 billion to $11.5 trillion in the third quarter of this year, primarily as a result of a $138-billion hike in the value of total assets.
But at the same time the household debt service ratio rose from 14.82 per cent to 14.9 per cent — an all-time high. Debt service ratio is measured as total obligated payments of principal and interest on credit market debt as a proportion of household disposable income. Growth in total debt payments (+2.0 per cent) outpaced growth in disposable income (+1.0 per cent), StatsCan said.
“Household credit market debt as a proportion of household disposable income reached 175.9 per cent from 175.4 per cent in the previous quarter (revised from 177.1 per cent). In other words, there was $1.76 in credit market debt for every dollar of household disposable income. Despite increasing slightly from the previous quarter, the ratio was below the high of 178.5 per cent recorded in the first quarter of 2017,” said StatsCan.
“Rising equity values and home prices provided a nice early Christmas gift to Canadian households, with net worth rising for a third consecutive quarter in Q3. Still, recent gains in net worth pale in comparison to prior years, courtesy of the slower home price growth, with net worth is up a modest 3.2 per cent year-over-year,” said Ksenia Bushmeneva, Economist with TD Economics, in a commentary note.
“Not everything in this report was uplifting,” wrote Bushmeneva. “Debt servicing costs continued to rise, reaching peak level. Household leverage also deteriorated for the first time in a year, as the so-called goldilocks convergence of income and credit growth hit a pause button, with credit outpacing disposable income.
“With the housing market firmly on the mend and mortgage rates still relatively low, mortgage credit advanced at the fastest pace since 2017.”
Priscilla Thiagamoorthy, Economist with BMO Capital Markets, said a larger proportion of income is being swallowed by interest payments — 7.5 per cent, the most since the second quarter of 2009, and household debt burdens will remain a crucial vulnerability for the Canadian economy for some time.
“If there’s one encouraging point it’s that the ratio has clearly stabilized after ramping up for much of the past two decades. And, while debt growth is climbing again, it’s only one half of the equation. Growth in disposable income has been accelerating over the past year, helping to temper any risks,” she said.Mario Toneguzzi is a business reporter in Calgary.