UPDATE 2-Record Canadian household debt ratio fuels concern, warnings

Fri Mar 11, 2016 2:05pm EST
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(Recasts with comments from economist, debt counseling services, consumer watchdog)

By Leah Schnurr and Matt Scuffham

OTTAWA/TORONTO, March 11 (Reuters) - Canadian household debt compared to income rose to another record high in the fourth quarter, reinforcing fears that borrowers and the broader economy will suffer a painful reckoning when interest rates eventually rise.

Years of low borrowing costs and rising home prices have contributed to Canadians taking on more debt since the financial crisis, with the central bank keeping interest rates low to support growth.

The ratio of household credit market debt to income rose in the fourth quarter to 165.4 percent, meaning that households held C$1.65 ($1.25) in debt for every dollar of disposable income.

Over 2015, mortgage debt surged 6.3 percent, the strongest growth since 2011.

Experts have long warned of the risk of a painful deleveraging once interest rates start to rise. The Bank of Canada, which cut rates twice last year, is not seen hiking until late 2017.

"It's something we may not need to worry about right away but definitely fast-forward the narrative a year, a year and a half, and I think it becomes an exceptional source of concern," said David Tulk, chief Canada macro strategist at TD Securities.

For now, borrowing costs remain cheap. The interest-only service ratio was around its record low in the fourth quarter.   Continued...