Consumer debt ratio up: $1.63 owed for every $1 in income

By Craig Wong, The Canadian Press September 14, 2013 - Canadian household debt climbed to a new high in the second quarter, turning around after creeping lower for two quarters, according to Statistics Canada.

Statistics Canada said Friday the ratio of household credit market debt to disposable income increased to a new high of 163.4 per cent in the second quarter compared with 162.1 per cent in the first three months of the year. That means Canadians owe just over $1.63 for every $1 in disposable income they earn in a year.

"If you listen carefully, you might hear quiet gulps from the Bank of Canada," BMO chief economist Doug Porter wrote in a report.

Household debt and its potential impact on the economy has been identified as a key concern by the central bank and Finance Minister Jim Flaherty.

Porter noted the prior two quarters, covering the October-March period when the key measure of debt started to head lower, were likely viewed positively by the Bank of Canada.

"What the Bank of Canada has described as a 'constructive evolution' of household balance sheets still appears to be unfolding, but the modest deterioration in the second quarter and the recent pop in home sales raise some doubts," he wrote.

"The lingering question mark on this front is one reason the Bank of Canada has doggedly maintained its mild tightening bias."

Tightening bias refers to the central bank's public position that its next move, at some point, will be to raise its key short-term lending rates.

The Bank of Canada's overnight rate has been stuck at the historically low rate of one per cent since September 2010.

The turnaround in household debt comes as the Canadian housing market also appears to be regaining some of the steam let out in mid-2012 when Flaherty tightened mortgage lending rules.

Home sales and prices have started to perk up in many markets across the country even as commercial banks have edged their mortgage rates higher.

During the second quarter, Canadians borrowed $25.9 billion, including $18 billion in mortgage borrowing. In the previous quarter, Canadians borrowed $3.8 billion for mortgages - the lowest level in four years - and reduced other loans and consumer credit.

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