Canada's Housing Bubble

Dec. 15, 2009 Tavia Grant  Globe and Mal

Mark Carney has good reason to fret about household balance sheets these days.

The debt-to-income ratio among Canadian households ballooned to a record in the third quarter as consumers snapped up homes and cars, Statistics Canada said yesterday. The report comes as household debt has emerged as the biggest risk to the country's financial system, Bank of Canada officials, including its Governor, Mr. Carney, cautioned last week. They warned both borrowers and lenders not to overextend themselves and to budget for a coming era of rising interest rates.

"It is becoming a risk," said Carlos Leitao, Montreal-based chief economist at Laurentian Bank Securities. "People will make parallels with the U.S. in '03 and '04. I don't think we're there, and I wouldn't overplay that. But the risk is there."

The central bank cut interest rates to a record low this year, and expects to keep them there until mid-2010 - a move which is both kick-starting the economy and fuelling an increase in borrowing.

Mr. Leitao expects the central bank will take some heat out of the market next year by starting to raise rates in the third quarter of next year and nudging them to about 2 per cent by the beginning of 2011.

Here's Statscan's breakdown of the state of our finances:

HOUSEHOLD NET WORTH

Net worth among households climbed 2.3 per cent to $5.7-trillion in the third quarter, as Canada's benchmark stock index gained 10 per cent. The July-to-September increase marks the second quarter of gains after three straight drops.

Household per-capita net worth is now $168,800 in the third quarter, still below the peak of $179,000 in the second quarter of last year.

The third-quarter increase in household net worth stemmed from higher values of financial assets, which include fixed-income securities, corporate equities, mutual fund investments and pension assets.

HOUSEHOLD DEBT

Household debt, as measured by mortgages and consumer credit, swelled 1.6 per cent as low borrowing costs spurred Canadians to buy homes and renovate. They also bought more cars, sparking a further increase in consumer credit, the agency said. Personal debt has risen in every year on record since 1962, except for in 1982. In the third quarter, "falling mortgage rates, along with increased sales of existing homes and renovations, sustained increases in mortgage demand," the report said. "Strength in auto purchases led to a further increase in consumer credit."

HOUSEHOLD DEBT-TO-INCOME The ratio rose two points to 145 per cent - the highest level since quarterly record keeping began in 1990. That means for every $100 of personal disposable income, Canadians now carry $145 in debt, compared with $88.60 in 1990.

NATIONAL NET WORTH

National net worth (or the sum of the net worth of people, businesses and governments) fell 1.3 per cent to $5.9-trillion, the third straight drop and the biggest decline on record, largely due to an increase in net foreign debt.

Government debt rose in the quarter. Total government net debt as a percentage of GDP rose to 40.9 per cent, up from 39.5 per cent in the previous quarter and 35.5 per cent in the same quarter of 2008.

Nonetheless, it's nowhere near the 90-per-cent range reached in the mid-1990s, the report said.