Canadian household debt-to-income ratios are easing – BoC

by Ephraim Vecina on 18 Nov 2018

While the debt-to-income ratios of households remain at a relatively high level, these are now starting to scale back from their red-hot peaks, according to Bank of Canada senior deputy governor Carolyn Wilkins.

“It took a long time for that vulnerability to accumulate and it’s going to take some time for it to diminish,” Wilkins told The Canadian Press.

“What we were hoping to see would be a continuing improvement in the quality of the loans because what that does is, over time, put the economy on a more-solid footing to withstand whatever adverse developments that might occur.”

A BoC analysis released last week noted that this year’s interest rate hikes along with stricter mortgage qualification rules have mitigated the risk of housing debt among Canadian borrowers – especially since a large fraction of the consumer population has adapted to the new normal by reducing their spending.

“The number of new highly indebted borrowers has fallen, and overall mortgage activity has slowed significantly,” according to the study’s co-authors Olga Bilyk and Maria teNyenhuis.

The downward trajectory of credit growth has also allayed fears of widespread household vulnerability.

Read more: Household debt poses critical risks for Canada’s booming economy

“Tighter policies around mortgage qualification and higher interest rates are having a direct effect on the quality and quantity of credit,” the study added.

The more rigid stress tests pushed down the proportion of new high-leverage insured loans, from 20% in late 2016 to 6% in Q2 2018. Meanwhile, the share of high-leverage uninsured mortgages fell from 20% a year ago to 14% as of the second quarter of this year.

“The most-pronounced decline has been in the number of new mortgages extended to highly indebted borrowers, which fell by 39% year-over-year in the second quarter of 2018.”

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