Canada's household leverage is not abnormal – National Bank

by Ephraim Vecina on 31 Jan 2018
Record levels of Canadian household debt have sparked concern it’s a bubble in the making, but leverage may actually be more conservative than people think, according to one of the country’s largest commercial lenders.

Household debt ratios and the rapid pace of home-price growth in Canada aren’t abnormal compared with global peers, National Bank of Canada said, citing data from the federal statistics agency that show the country’s economy is expanding at the fastest pace in the Group of Seven and job growth is surging.

Toronto and Vancouver home prices have soared in recent years and Canada’s debt-to-disposable income ratio is at an all-time high, but the numbers don’t seem so extreme when compared with other global cities such as London or Hong Kong that have higher prices and ratios, National Bank economists Stefane Marion and Matthieu Arseneau said earlier this month. Population growth will also continue to strengthen Canada’s economy, especially as immigration policy stokes demand for housing in the fastest-growing markets.

Read more: No new regulations, drastic home price increases in 2018 – analysis

“After controlling for fundamentals such as employment, population growth, housing tenure, immigration, education and the solidity of the welfare system, our analysis suggests that the ratio of household debt to disposable income in Canada is relatively conservative,” Marion and Arseneau stated in their report, as quoted by Bloomberg. “This probably reflects the cumulative effect of all actions taken to date to mitigate the vulnerability of the financial system to household indebtedness.”

Canadians have binged on cheap credit to rack up expenses on homes and cars, pushing the ratio of household debt to disposable income to above 170 percent. Rising Bank of Canada interest rates will make it more expensive for borrowers to service the $1.5 trillion in mortgage credit outstanding.

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