June 14, 2018 / 2:53 PM / 4 months ago

Canada debt-to-income ratio hits two-year low as rates set to rise

OTTAWA/TORONTO (Reuters) - Canadian household debt as a share of income slipped in the first quarter to a two-year low, a development sure to please policymakers worried about the pain that rising interest rates will cause.

FILE PHOTO: People go shopping in the Eaton Centre shopping mall as they walk by a giant Christmas Tree in Toronto, December 7, 2012. REUTERS/Mark Blinch/File Photo

The ratio of debt to disposable income - which hit a record 170.0 percent last year - fell to 168.0 percent from 169.7 percent in the fourth quarter, Statistics Canada said on Thursday. This was its lowest since the 165.4 percent recorded in the first quarter of 2016.

The Bank of Canada, which regularly expresses concerns about Canadians’ debt levels as interest rates rise, last week said slowing credit growth among households and higher incomes have reduced vulnerabilities.

The central bank has raised rates three times over the last year and is widely expected to lift them again next month.

Royce Mendes, senior economist at CIBC Capital Markets, said the implications of the lower debt ratio were pretty positive.

“What we’ve been worried over this recovery in Canada has been the vulnerability posed by these high household debt levels and policymakers have been working to find ways to reduce those risks,” he said in a interview.

“A more gradual pace to rate hikes, one that creates an environment that the economy can still (thrive), is the best way to contain the risks from high household debt ratios.”

Disposable income rose by 1.3 percent while credit market debt edged up by 0.3 percent.

On a seasonally adjusted basis, households borrowed C$22.2 billion ($17.1 billion) in the first quarter, down from C$25.4 billion in the preceding quarter.

Mortgage borrowing fell to C$13.7 billion from C$15.7 billion, the lowest since the second quarter of 2014, pulled down by higher rates and new mortgage regulations.

The debt service ratio, which measures debt principal and interest payments as a proportion of income, remained relatively flat at 13.9 percent.

Separately, Statscan said new home prices were flat for the second month in a row in April as higher interest rates and tougher mortgage regulations dampened buyer enthusiasm.

Analysts in a Reuters poll predicted no change from March.

Prices in Toronto fell 0.5 percent, the fourth monthly decrease in a row, after the provincial government had instituted measures last year to rein in the city’s hot market.

Reporting by David Ljunggren and Fergal Smith; Editing by Dan Grebler

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