CMHC warns on household debt
Canada Mortgage and Housing Corp. cautioned that Canadians need to be “vigilant” about growing levels of household debt, noting ramped-up use of personal lines of credit and increasing debt-to-disposable income ratios.
“Household financial vulnerability remains a serious issue that merits close attention going forward,” the CMHC said in its annual Housing Observer report published Thursday.
Personal lines of credit have been increasing at double-digit annual rates since 1986, growing at a faster rate than any other sub-component of household debt, the report said, and represented slightly more than 25% of household debt held by chartered banks in 2010, up from about 3% in 1986.
“It is important that consumers and stakeholders continue to be vigilant in monitoring both the magnitude as well as the composition of household debt and take appropriate action,” said the CMHC, the government-owned provider of mortgage insurance.
But Benjamin Tal, deputy chief economist at CIBC World Markets, said when it comes to debt Canadians have actually done fairly well, especially when it comes to holding back on consumer credit, pointing to “some sort of debt fatigue in this country.”
“We’ve been accumulating a lot of debt but the quality of the debt is still okay,” he said.
Mr. Tal said the real challenge for households lies ahead: “The big test will be the next 12 to 18 months. Can we resist the temptation when interest rates are so low?”
The CMHC report found residential mortgages continue to account for the largest chunk of Canadians’ total household debt, representing 68% in 2010, compared with a low of 63% in 1971 and a high of 75% in 1993.
Over the 2001-to-2010 period, mortgage debt has fluctuated between 69.0% and 67.7%, the CMHC said.
The report noted that most Canadians could handle some level of economic adversity owing to “the high quality of mortgage credit in Canada, the substantial equity position of most Canadian homeowners with a mortgage, and households’ ability to adapt their discretionary spending.”
Ottawa has intervened to tighten mortgage rules three times in recent years and the report noted the latest changes “will further reinforce the stability of the Canadian housing market.”
However, the CMHC cautioned that major challenges to Canadians’ ability to pay their mortgages could come through job losses, another recession or rising interest rates.
Yet, Mr. Tal noted that a significant increase in the unemployment rate is unlikely to come hand-in-hand with rising interest rates, as the Bank of Canada increases rates when the economy is improving and joblessness is falling.
“That’s why I’m not talking about a crash or a time bomb,” he said.
Meanwhile, the report also highlighted the increasing ratio of debt-to-disposable income as a point of concern about levels of indebtedness.
Compared to annual disposable income, household debt stood at 150.6% in the second quarter of 2011, a record high at the time, the CMHC noted. The ratio was even higher at 152.98% in the third quarter, according to Statistics Canada.
The report pegged the low-interest rate environment and rising income and net worth — allowing Canadians to borrow larger amounts — as factors in this trend.
Mr. Tal admitted that an increase in the rate of growth of debt to income can be alarming, but noted that the indicator is not entirely useful in his view as no one is asked to repay their entire mortgage in one year, for example, and the ratio measures total debt versus annual income.
Finally, the report found the number of Canadian households considered “financially vulnerable” increased to about 6.5% in 2010, still lower than levels seen in 2000 and 2001, but slightly above the 12-year period from 1999 to 2010.
The Bank of Canada applies this term to households that spend 40% or more of their gross income on total debt payments and the number tends to increase as the economy and employment weaken, the report said.