Canada household debt levels rise to record highs

OTTAWA (Reuters) - Canadian household debt compared to income rose to a record in the second quarter, highlighting one of the key vulnerabilities to the financial system the Bank of Canada is watching.

Shoppers leave Target's Lindsay, Ontario store January 15, 2015. REUTERS/Fred Thornhill

In the wake of low oil prices, the bank said earlier this year the biggest domestic risk is that jobs and income decline enough to reduce Canadians’ ability to pay their debt, leading to a housing correction.

Since then, the central bank cut interest rates for the second time this year, raising concerns Canadians might take on more debt than they can handle.

There has also been concern Canadians might be in over their heads if cheaper oil leads to widespread layoffs, but so far the broad labor market has been resilient.

“At this stage, there’s always the risk of seeing a somewhat higher share of delays of payment in (Alberta) in the next 18 months because of the lag effect of the oil shock,” said Sebastien Lavoie, assistant chief economist at Laurentian in Montreal.

“Right now, we’re in a good position in the sense that we haven’t seen any distress from Canadian households overall, despite the oil shock.”

The leverage ratio rose to 164.6 percent in the second quarter from 163.0 percent in the first quarter, Statistics Canada said on Friday. The ratio is not seasonally adjusted.

Economists warned the Bank of Canada will need to use caution when it eventually raises interest rates, though that is expected to be a long way off. The latest debt data was unlikely to alter the path of monetary policy.

The increase in the leverage ratio in the second quarter came as disposable income increased at a slower pace than household credit market debt, which includes consumer credit, mortgages and non-mortgage loans.

Even accounting for seasonal factors, the debt-to-income ratio rose 0.9 percentage points, “which will do little to quell policymakers’ concerns about the degree of leverage in the Canadian household sector,” Laura Cooper, economist at RBC, wrote in a note.

On a seasonally adjusted basis, households borrowed C$26.3 billion ($19.85 billion) in the second quarter, an increase of C$3.7 billion from the previous quarter. Mortgages accounted for the largest portion of that at C$17.7 billion.

But the interest-only debt service ratio remained at historic lows at 6.3 percent, suggesting households are able to manage their debt for now.

Reporting by Leah Schnurr; Editing by W Simon and Meredith Mazzilli