It's starting to look as though the multi-year rise in Canadian households' debt burden is really over. StatsCan reported today that the debt-to-income ratio slipped in the first quarter of this year to 1.68. That's the lowest level in two years, and compares to a peak ratio of 1.70 seen in the third quarter of last year. Although the debt/income ratio generally falls in the first quarter of every year, the decline this year is the biggest on record.
The turnaround appears to be directly related to tightened mortgage lending rules, rather than any sudden epiphany on the part of borrowers. This is confirmed by the fact that new mortgage lending in the first quarter was the lowest since the second quarter of 2014. There is plenty of anecdotal evidence that borrowers unable to secure financing from banks under the new rules are turning to more expensive non-bank lenders -- witness the ever-present ads for "Harold the mortgage closer" on local TV stations*. Of course, by its very nature such borrowing is much harder for StatsCan to keep track of.
Today's data support last week's assertion from the Bank of Canada that the systemic risk posed by excessive debt is starting to ease. Even so, the debt/income ratio remains well above the levels that prompted the financial crisis in the US a decade ago. As long as incomes continue to rise, the debt burden will continue to edge lower, but if anything causes the employment situation to turn sour -- a trade war with the US, for example -- the risks to the financial system and the overall economy will start to increase again.
* Until quite recently the lugubrious Harold was mainly in the business of pawning gold and jewelry.
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