Canadians Are Starting to Ease Up on Their Household Debt Binge

(Bloomberg) -- Canada’s debt to disposable income ratio declined by the most on record in the first quarter, boosting confidence the country’s households can handle higher borrowing costs.

The ratio fell to 168 percent in the first three months of 2018, from 169.7 percent in the prior period, Statistics Canada said Thursday in Ottawa. The 1.7 percentage point decline was the most in data back to 1990, and follows an almost continual run of increases to a record 170 percent in the third quarter of 2017.

Credit-market debt rose just 0.3 percent January to March, reflecting the lowest volume of mortgage borrowing in almost four years. Disposable income increased 1.3 percent. Meanwhile, a separate Statistics Canada report showed the country’s new housing price index was flat in April, and Toronto prices posted the first 12-month decline since 2009.

The figures suggest risks from the decade-long, debt-fueled housing boom are moderating, clearing the way for the Bank of Canada to continue increasing interest rates to more normal levels. Governor Stephen Poloz has already lifted rates three times since last summer and investors predict he’ll hike again at the July 11 meeting.

Moderating housing costs “will give the Bank of Canada breathing room to maintain a gradual pace of tightening,” Andrew Kelvin, senior Canada rates strategist at Toronto Dominion Bank in Toronto, said in an email.

Canadians Are Starting to Ease Up on Their Household Debt Binge

Real estate executives and policy makers have said mortgage growth should slow this year after tougher federal rules took effect. Some buyers have also been deterred by high prices in Vancouver and Toronto, and by higher borrowing costs.

Mortgage borrowing declined by C$2 billion ($1.5 billion) to C$13.7 billion in the first quarter, compared with the prior three-month period, Statistics Canada said.

Home price overvaluation in Toronto has been easing and the risk of a price bust across the province of Ontario has faded to “low,” from “moderate” last year, Canada Mortgage and Housing Corp. said Thursday. The federal housing agency also said Ontario’s rising population and incomes should support home prices after some weakness early this year.

Toronto’s new-home price index fell 0.5 percent in April from March, the fourth straight decline. In Vancouver prices have been flat for four straight months.

Still, dangers remain. Poloz said last week that while financial-market risks linked to consumer finances are easing, the sheer size of the debt means the tensions will persist for some time. Statistics Canada figures showed overall household borrowing remains above C$2 trillion, about equal to the country’s gross domestic product.

Robert Hogue, senior economist at Royal Bank of Canada, said even though the country’s debt service ratio has remained stable, he expects it to come under “upward pressure” in the period ahead.

“In our view, this will be a key factor restraining household spending growth this year,” Toronto-based Hogue wrote in a note to clients. “It will also be an element keeping the Bank of Canada cautious about raising rates.”

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