Briefing highlights
- What to expect in today’s debt report
- The state of Canadian credit
- Markets at a glance
- CREA cuts 2017 home sales outlook
That's not likely to get you very far at the bank.
The reality is that many of us are drowning in debt, and we got further proof of that from Statistics Canada this morning: The key measure of household debt to income rose in the second quarter to 167.8 per cent from 166.6 per cent in the first three months of the year.
Because it's for the second quarter, it pre-dates the Bank of Canada's two recent interest rate hikes. Which also means that, for some consumers, things are even worse.
That means we owe $1.68 for each dollar of disposable income.
"The key takeaway from today's snapshot on Canadian household finances is not the usual headline of another record high for the debt-to-income ratio, which did surge to an all-time high of 167.8 per cent," said Royal Bank of Canada economist Laura Cooper.
"Instead a decline in household net worth, albeit modest, alongside a sharp increase in consumer credit growth, are notable as together they suggest that the ability of households to absorb higher interest rates continued to deteriorate," she added.
"Beyond this, overall debt accumulation by Canadian households jumped in the second quarter of 2017 while asset appreciation slowed sharply led by poor equity market performance."
Total household debt - consumer credit, mortgage and non-mortgage debt - now stands at $2.1-trillion. Mortgage debt rose 1.6 per cent to $1.4-trillion, with consumer credit up by a faster 2.4 per cent to almost $610-billion.
Noteworthy is that new mortgage borrowing declined, while other loans and plastic rose.
Take heart: We're a wealthy nation, though net worth on a per-capita basis dipped $1,300 to $385,900.
Also worth noting is that the second quarter traditionally marks the "biggest seasonal increase" in that measure, said Benjamin Reitzes, Bank of Montreal's Canadian rates and macro strategist.
Thus, expect it to slow in the second half of the year, helped along by cooling real estate markets and the central bank's rate increases.
"Keep in mind that last week's rate hike follows the 0.25-per-cent increase in July, so new homeowners and those with tight budgets may start to feel the impact of the recent rate hikes," Scott Hannah, chief of the Credit Counselling Society, said after the report.
"For homeowners with variable rate mortgages, now is a good time to switch over to a long-term fixed rate. Consumers will need to weigh the benefits of having a fixed-rate they can rely upon for up to 5 years versus having a lower-rate variable interest rate that will likely be subject to additional rate increases over the next year or so."
Buy cheaper cat food.
Given that today's report is a bit out of date, here's how things looked in July:
"Households accumulated credit at the quickest pace in July, 2017, since October, 2011, with outstanding balances rising by 5.7 per cent from a year ago," said RBC's Ms. Cooper.
"This compared to a recent low of 2.6 per cent in January, 2016, and resulted in the amount of debt owed by Canadians climbing to nearly $2.1-trillion."
One of the interesting things here is that consumers were growing ever keener on personal lines of credit and loans, and credit loans. The annual increase on that front picked up to 4.4 per cent, the fast since early 2011.
Ms. Cooper also pointed out the recent trend toward home equity lines of credit, or HELOCs. Consumers pumped up their credit balances in each of the last four quarters by $10-billion to $12-billion, with HELOCs a key part of that.
Sell the antique. And make do with last winter's mitts.
Here's where interest rates stand, and where they may be headed:
The Bank of Canada, having cut rates during the oil shock, has now taken all of that back, with increases of one-quarter of a percentage point in July and again in August amid much stronger economic readings.
Its benchmark overnight rate now stands at 1 per cent, and analysts are redoing their timelines.
Some expect that the key rate will be in the range of 2 per cent by the end of next year, give or take a quarter of a percentage point.
If you consider the upper end of that range - 2.25 per cent - the benchmark will have moved by 175 basis points since the central bank begain its tightening cycle.
"Particular focus will be given to the evolution of the economy's potential, and to labour market conditions," the Bank of Canada said in its September statement.
Cut back on the holiday spending and gift wrap. Brown paper sounds good, actually.
Some interesting facts from RBC's Ms. Cooper, as of midyear:
1. "If rates were to rise 100 basis points over the next year, households, in aggregate, would have to allocate an additional 2 cents of every $1 of income to servicing debt." Well, we're halfway there.
2. "Interest payments on non-mortgage debt are equal to the total interest costs associated with mortgages, despite total non-mortgage debt balances being lower."
3. Loans for vehicles represented 15 per cent of debt, with delinquencies on the rise.
4. "The aggregate value of home equity in Canada is lower once home equity lines of credit are taken into account."
6. "One in 10 older-age households had debt in excess of $100,000 in 2016, posing potential challenges for future retirement security."
It's not all doom and gloom:
7. One-third of Canadian households have no debts, and 25 per cent of them owed below $25,000 last year.
8. Delinquency rates were tiny, just 0.3 per cent.
9. Assets eclipsed credit balances by almost six to one.
10. Unemployment was forecast to ease.
Forget the chalet this season, and join the neighbours carolling door to door.
The housing market is key to all of this, of course. Here's how things look:
Federal and provincial governments have intervened several times to tame overheated markets, the latest being Ontario.
What's interesting is that the Vancouver market, hit by a provincial tax on foreign buyers, is on the rebound. And the Toronto area's inflated market, hit by a similar tax on foreign speculators, as well as other measures, is showing signs of bottoming, according to some economists.
"The housing market adjustment in the GTA could be prolonged by the shift to Bank of Canada tightening," said BMO senior economist Robert Kavcic.
"The extent, of course, will depend on exactly how rate hikes evolve from here, with solid economic fundamentals and the bank's awareness of the "sensitivity of the economy to higher interest rates" most likely containing the fallout," he said in a report Thursday.
"In the meantime, home prices should correct at least modestly further, consumer spending power could be gradually eroded, and mortgage lending growth should moderate."
The noodles alone should fill you up.
So how vulnerable are we? Many Canadians have their act in gear, and others are getting there. But here's the state of play, and the potential impact:
"We anticipate that households on the whole will be able to absorb rising costs given an expected gradual pace of policy tightening and ongoing hiring gains," RBC's Ms. Cooper said recently.
"But as is the case with all goods things – the borrowing binge is likely coming to an end."
She said Thursday that that's still largely the case, but some consumers are obviously vulnerable given the rate increases. At the very least, they'll have to redraw their household budgets.
"The rate hike should have an immediate economic impact," added Moody's Analytics economist Paul Matsiras.
"Borrowing costs will be a little bit higher, quickly raising costs for consumers with variable-rate forms of debt," he added.
"Depending on how quickly financial institutions begin pushing up their lending rates, households with variable-rate mortgages, or consumers with adjustable-rate student loans, could see their credit payments rise notably.
Added BMO's Mr. Kavcic: "While this will likely lead to slower mortgage credit growth, and force some households to curtail other discretionary spending, it shouldn't break household finances to the point that we see a wave of defaults and associated consequences."
In its June financial sytem report, the Bank of Canada noted that the proportion of new mortgage borrowers with out-of-this-world debt - those with a loan-to-income ratio that tops 450 per cent - has now declined to about 10 per cent from 17 per cent early last year.
"This indicates that the quality of credit has improved significantly for high-ratio mortgages," the central bank said, adding it expects it to get better still because of mortgage rule changes.
But it's still 10 per cent.
Buy her a cheaper prom dress.
Take solace in this: Governor Stephen Poloz and his Bank of Canada colleagues have your back. Here's how it looks:
As noted, they said when they raised their benchmark last week that "given elevated household indebtedness, close attention will be paid to the sensitivity of the economy to higher interest rates."
Which means that a wave of defaults, which isn't expected, could play a role. And, as many economists note, consumer spending is going to slow.
"While presently, BoC is signaling a reasonable level of comfort with embarking on a path of gradual policy normalization, the relatively frothy condition of the real estate market and its contribution to past growth creates uncertainties … about the potential heightened sensitivity of growth to rising interest rates," said Daniel Hui of JPMorgan Chase.
"Our economists recently assessed housing market correct risk in Canada to only be around 20 per cent probability, although the study was done based off of examination of historic price and affordability trends," he added.
"But the additional question of the sector's resilience to progressively tightening financial conditions will come under increasing focus the further we proceed in the normalization cycle."
Time will tell.
"Over all, Canadian balance sheets are in decent shape, despite persistent concerns," BMO's Mr. Reitzes said.
"The question now is how sensitive are households to higher rates? We'll find out with the BoC's surprisingly aggressive policy shift."
Read more
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