EconoFACTS

June 11, 2021 | 10:16

Debt-setting

Economist

Economist
Economics

Priscilla joined BMO Capital Markets in 2016 and plays a key role in analyzing Canadian household trends and the... (Read more)

Priscilla Thiagamoorthy

Economist
Economics

Priscilla joined BMO Capital Markets in 2016 and plays a key role in analyzing Canadian household trends and the... (Read more)

Canada's household debt-to-disposable income ratio edged lower in the first quarter of this year, down 2.2 ppts to 167.7% in not-seasonally-adjusted terms. That now marks six straight quarterly declines after holding near all-time highs before the pandemic. In seasonally-adjusted terms, the ratio stepped 1.8 ppts lower to 172.3%. Credit market debt slowed to 1.3% as demand for mortgage loans fell from a record high while non-mortgage debt held steady. And, after wilting in the prior two quarters, household disposable income climbed 2.3%, pushed up by higher wages and still-elevated government transfers.

The household debt service ratio (interest and principal as a share of disposable income) dipped to 13.45%, back within the pre-pandemic range. With mortgage rates near record lows in the first quarter, a smaller share of total debt repayment was directed to the interest portion—6.07%, the lowest in 30 years of data.

With real estate values soaring to lofty levels, the asset side of the balance sheet provided plenty of positives for the record books. Net worth climbed almost 35 ppts to 932.9% of disposable income, marking an all-time high amid a red-hot housing market and a nice rally in equities. Meantime owner’s equity in real estate climbed to a record 76.5%. That’s notable considering the ratio has held within a tight range under the 75%-mark for the last three decades. The net foreign asset position also hit the highest ever, as global stocks outperformed Canada’s benchmark. And, the debt-to-asset ratio stepped down to 15.4%, the lowest since the first quarter of 2002.

While household debt ratios improved, government debt ratios deteriorated over the past year. Gross general government debt (includes all levels of government) edged down to 138.2% of GDP in the latest quarter, but that's just under the prior quarter’s record high of 141.0%, while net debt-to-GDP climbed above the 50%-mark, for the first time since 2005Q1.

Bottom Line: Canadian household finances improved in the first quarter of this year as the key household debt-to-disposable income took yet another step away from the record highs seen prior to the pandemic. Although the growth of mortgage debt could continue to slow in the coming quarters, the flow remains elevated. As such, housing market imbalances and still-high household debt remains a key vulnerability to the Canadian economy.

Table 1 - Canada — National Balance Sheet Accounts

(percent)

Source: BMO Economics, Haver Analytics