Canadian household debt hits new high

Figures released by Statistics Canada Monday suggest Canadian households are more financially vulnerable than previously thought.

The ratio of credit market household debt to disposable income hit 163.4 per cent in the second quarter, up from 161.8 per cent in the previous period, the agency said.

Credit market debt strips out trade accounts payable, or short-term credit — normally interest free in order to encourage commerce — that suppliers extend to small businesses, including home businesses.

That number is also about where households in the United States and the United Kingdom stood before home values crashed.

"Today’s report indicates that Canadian households are more financially vulnerable than had previously been thought," said TD economist Diana Petramala in a commentary.

That's because even though Canadians hold more assets than their counterparts in the U.S. and the U.K. did before the crash, most of those assets are locked into the value of their homes, which could take a tumble in a housing correction or if the economy tanks.

"Overall, this supports our bearish view that Canada's housing boom is unsustainable and the eventual correction, which we think is already underway, is likely to have material negative implications for growth in the broader domestic economy," Capital Economics said in a note.

At the peak of the U.S. housing bubble in 2007, household debt to income there hit a high of 170 per cent.

Mortgage rules tightened

Still, analysts caution that Canada's housing market is on a more solid footing than was the case south of the border.

Canadians tend to hold more equity in their homes and many of their mortgages are backed by the federal government through the Canada Mortgage and Housing Corp. As well, risky subprime mortgages represent a small percentage of lending.

Ottawa has moved four times in as many years to tighten mortgage rules to keep marginal buyers out of the market, most recently in August.

The latest change, which added to monthly payments on insured, first-time purchases, has been partially credited with a recent slowing in home resales, particularly in previously hot markets of Vancouver and Toronto, and with a moderation in prices.

Finance Minister Jim Flaherty, Bank of Canada governor Mark Carney and various economists have warned Canadians that they should keep their debt to levels they can still manage when interest rates eventually rise from their current record lows.

The Bank of Canada has kept its key overnight lending rate at one per cent for more than two years, and Carney has warned that it will have to rise at some point.

The StatsCan report revised the numbers for the debt-to-income ratio going back as far as 1990. That revision lowered national net worth by $6.4 billion, or roughly $2,000 per person, based both on a higher estimate of debt and a lower evaluation of disposable income.

Before the changes, the agency estimated that the total debt to income ratio was 152 per cent in the second quarter.

Average home equity estimated at 69%

Its new estimate of national net worth increased by 1.2 per cent to $6.8 trillion, up from $6.7 trillion in the first quarter.

StatsCan also increased its estimate of asset values, estimating that homeowners on average now hold 69 per cent of the equity in their homes, compared with 64 per cent before the revisions.

Canadians have more assets than previously thought, with per capita net worth rising $7,900 to $190,200 due mostly to an improved calculation of holdings in unlisted company shares.

The changes in the historical data suggest that the increase in household indebtedness since 2004 has been sharper than previously thought, with credit growing an average of one percentage point higher per year than was originally reported.

The biggest share of that increase was accounted for by mortgages.

The revision of historical data on national net worth was based on five major changes on how to measure the value of non-financial assets of such things as research and development activities and home values.

StatsCan also stripped out non-profit institutions from the household category, getting a more accurate reading on the state of family finances.

New data released Monday by the Canadian Real Estate Association showed sales of existing homes fell 15.1 per cent in September from a year ago, although last month's numbers were slightly higher than in August.

Bank of Montreal economist Doug Porter said he believes the trend points to a soft landing for housing, not a crash.