The high level of household indebtedness in Canada has been causing alarm in official circles (and on this blog) for several years now. Even as the Bank of Canada has been gently moving interest rates higher, it has continued to identify high household debt as a factor that could limit its ability to move policy toward more neutral settings.
On a national basis, the household debt/income ratio seems to have stopped increasing this year, although at 1.71 (or debt at 171 percent of income, if you prefer) as of mid-2018 it is hardly reassuring. That's a significantly higher figure than was seen in the US before the financial crisis. South of the border the debt burden has been heading lower for the past several years, whereas in Canada it had been steadily rising before appearing to plateau this year.
Now we have a new report from Canada Mortgage and Housing Corporation (CMHC), pointing out significant and worrisome differences in the debt burden between major cities across the country. The lowest ratio, at 1.06, is found in the small city of Saint John, New Brunswick. The highest by far is in Vancouver, at 2.42, followed by Toronto at 2.08. Given that these are respectively the third largest and largest cities in Canada by population, these numbers suggest that a significant number of Canadians are at significant risk of financial difficulties if interest rates continue to rise.
It seems likely that the Bank of Canada will be keeping rates on hold for the next few months, mainly because there are few signs that the apparent tightness in the labour market is leading to wage pressures. The problem for the Bank is that the CMHC data seem to show that, despite actual increases in debt servicing costs and repeated warnings of more to come, Canadians are showing little inclination to start paying down their debts. With the housing markets in both Toronto and Vancouver showing signs of moving higher again, high household debt promises to remain a headache for policymakers well into the future.
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