Mario ToneguzziConcerns about household debt in Canada have come down a notch – the first real signs of easing indebtedness in decades, according to a report by RBC Economic Research.

The Focus on Canada’s Household Debt report, by senior economist Robert Hogue, says the first quarter of 2018 experienced the largest quarterly drop in the debt-to-income ratio since 2001 on a seasonally adjusted basis.

“Clearly, macro prudential measures and the cooling of Canada’s housing market are having the desired effect on the liabilities’ side of the ledger. Rising interest rates also help restrain debt accumulation, though at the same time they pose a risk to Canadian households’ ability to manage their debt service costs,” says Hogue.

“Yet to date, rapidly rising household income is keeping that risk in check.”

The report found that accelerating disposable income and slowing mortgage growth are the driving forces behind the recent improvement in household indebtedness.

“This bodes well for further improvement in the near term because both trends are likely to persist amid tight labour markets and cooler housing market activity in Canada,” says Hogue.

“The flip side of a cooler housing market, however, is that slower growth in the value of real estate holdings tempers the asset side of the ledger and causes households’ net worth to erode slightly. Still, this shouldn’t be a big worry at this stage considering how much both assets and net worth increased over the past several years. Back-to-back declines in the last two quarters hint that household debt-to-income ratio might have turned a corner last year after increasing fairly steadily for decades.”

But at 168 per cent in the first quarter, the ratio remains near record-high levels and continues to flag elevated vulnerabilities in the household sector, says the report.

It says Canadian households are now accumulating debt at a slower pace. Growth in households’ credit market debt eased to a three-year low of 4.5 per cent in the first quarter. Also household disposable income rose at its fastest annual rate (five per cent) in nine years the first quarter.

“Canadian households’ net worth dipped slightly in the first quarter but remains historically high. Net worth now represent 857 per cent of household disposable income. While this is down from an all-time of 878 per cent set a year ago, it is still 100 percentage points above the figure five years ago,” says Hogue.

Respected business writer Mario Toneguzzi is a veteran Calgary-based journalist who worked for 35 years for the Calgary Herald in various capacities, including 12 years as a senior business writer.


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