Assets, liabilities and cashflow

Rejoicing in the land, or at least in the business pages, at the news that the seemingly inexorable rise in Canadian household debt may have halted.  StatsCan reported on Thursday that the ratio of household debt to disposable income edged down from 170.5 percent in Q3/2017 to 170.4 percent in Q4.  Moreover, the Q3 number was itself revised lower from an initially-reported figure of 171.1 percent, an all-time high.  The dollar value of household debt rose by about 5 percent in 2017, with both mortgage and non-mortgage debt rising at approximately the same pace.

There is other good news in the survey, if that's what you are inclined to look for.  Household net worth rose 2.1 percent in Q4, led by gains in the value of financial assets, which account for about 60 percent of total wealth.  In contrast,  the value of the national housing stock rose only marginally in the reporting period as major markets, notably the Toronto area, pulled back in response to government measures to cool things down.

The asset side of the balance sheet bears closer scrutiny.  Note that the data are for the final quarter of last year, when the nine-year equity bull market was still going strong.  Although it may be too soon to call an end to that bull run (the second longest on record), market action in the current quarter  suggests that further significant gains in the value of financial assets will be harder to come by.

Then there's the housing component. The Canadian Real Estate Association just reported that the average price of a Canadian home fell by 5 percent in the year to February.  Prices in the Toronto region have fallen much more sharply, by more than 12 percent over the same period.  Despite the usual whistling past the graveyard on the part of realtors, there is little prospect of any near-term rebound. 

Then there is the cashflow question. Despite the apparent signs of leveling-off in the second half of 2017, the debt-to-income ratio is at a record high.  Canada stands almost alone among major economies in not reducing the debt burden in response to the global financial crisis.  Something like 20 percent of all outstanding mortgages come up for renegotiation in the next twelve months, inevitably at higher rates, so the burden on disposable cashflow will increase.  This is not to suggest that households are about to default in droves, but the problems facing the rising number of highly-indebted households will only get worse.

The bottom line here is that in 2017 household debt increased by about $5 billion, while national net worth lagged slightly with a gain of just more than 4 percent for the year as a whole.  But while debts are intractable and fixed, asset values fluctuate, sometimes violently.  It is reasonable to surmise that while the value of household debt at the end of the current quarter will be little changed from the end of 2017, net worth will have shrunk, as a result of the pullback in house prices and the headwinds facing financial markets.  In short, yesterday's data from StatsCan are good news, but it is way too soon to suggest that the risks posed by household indebtedness are on the wane.