EconoFACTS

June 13, 2022 | 09:16

Cdn National Balance Sheet Accounts (2022Q1) — Calm Before the Storm

Economist

Managing Director, Canadian Rates & Macro Strategist
Fixed Income Strategy

Benjamin has been with the Bank of Montreal for over a decade. He is responsible for the Canadian macro-economic... (Read more)

Benjamin Reitzes

Managing Director, Canadian Rates & Macro Strategist
Fixed Income Strategy

Benjamin has been with the Bank of Montreal for over a decade. He is responsible for the Canadian macro-economic... (Read more)

Canadian household debt ratios fell 2.5 ppts to 182.5% in Q1 (seasonally adjusted), from the prior quarter's record high. On an unadjusted basis, the debt-to-income ratio rose just under 1 ppt to 180% (matching the record high hit in late 2018). Solid income growth was a large factor, as liabilities rose 1.3% in the quarter, driven mainly by mortgage debt. Recall that the housing market was still solid to start the year, with sales only starting to pull back notably at the end of the quarter when the Bank of Canada began raising rates. The household debt service ratio (interest and principal as a share of disposable income) dipped as well, reversing most of the prior quarter's increase, and has been steady for the past year or so. However, with interest rates rocketing higher as the BoC hikes rates aggressively, debt service payment are poised to climb sharply.

Household asset ratios, always overshadowed by the debt headlines, rose in Q1. Household net worth climbed to yet another record high of 1,083% of disposable income, as the last gasp gains in home prices overwhelmed losses in bonds and foreign equity holdings. Owners’ equity in real estate rose four ticks to 77.2%, a record high, though the coming drop in prices will put a dent in that metric over the rest of 2022.

The debt-to-asset ratio rose ever so slightly to 14.41%, just 0.01% above the prior quarter's two-decade low. This implies that Canadian households have $6.94 of assets for every $1.00 of debt. With strong nominal Q1 GDP growth, Canadian household debt to GDP ratio fell to 106.5%, a two-year low.

The big increase in nominal GDP helped dampen government debt ratios in Q1. Gross general government debt (includes all levels of government) dropped to 132.6% of GDP, still massively above pre-pandemic levels that were close to 110%. And, net debt fell 1.7 ppts to 43.1% in Q1, still 6 ppts above pre-pandemic levels. These figures highlight one of the few benefits of inflation, they erode debt ratios thanks to bigger gains in nominal activity.

Key Takeaway: Most debt ratios improved in Q1, thanks to strong income growth, surging nominal GDP, and a last gasp higher in home prices. While the first two factors are likely to repeat in Q2, home prices are already headed lower, and will weigh on balance sheets in Q2. Expect a softer housing market to drive debt growth lower as well, which could for a time dampen debt ratios...at least until higher rates and inflation dampen activity and income more. Very high debt burdens, amid rapidly rising rates and a melting growth outlook, are going to be a serious challenge for the Canadian economy. Lastly, we're reminded of the saying "while asset prices can rise and fall, debt endures."

Table 1 - Canada — National Balance Sheet Accounts

(percent)

Source: BMO Economics, Haver Analytics