Economists split on where record debt levels will go from here

Household debt remained at record levels in the fourth quarter, Statistics Canada said Friday, while economists are torn as to whether consumers are reining in borrowing or not.

Household debt to disposable income – or the money left over after paying taxes – held steady at almost 165 per cent in the last three months of 2012, compared with 164.6 per cent in the third quarter.

That means for every dollar in after tax income a Canadian household earns, it owes $1.65. On an annual basis, the level of debt increased by 5.5 per cent in 2012.

Household credit market debt includes consumer credit, mortgage, and loan debt.

Household borrowing in consumer credit, loans and mortgages totalled $14.7 billion in the fourth quarter, led by $11 billion in mortgage borrowing.

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By the end of the quarter, mortgage debt hit $1.1 trillion, consumer credit debt stood at $477 billion.

However, the report said leverage was largely unchanged in the quarter, with owner’s equity as a percentage of real estate remaining just under 69 per cent.

While there is agreement that consumers are heeding the Bank of Canada’s warnings to rein in borrowing, economists at CIBC said lagging income growth means that “short of a major shock to the system” that would force a drastic slowdown, overall credit expansion will go on unabated albeit at a slower pace.

“Dismal income growth in Canada also means that the widely watched debt-to-income ratio will continue to set record highs in the coming quarters,” Benjamin Tal, one of the bank’s senior economists said.

Over at TD Bank, economists there say the rate of borrowing is stablizing however, and poised to move back in line with income growth.

“The level of household debt remains a concern but the moderation in growth seen over the last few quarters is encouraging and underscores the Bank of Canada’s view that households are exercising more restraint,” Jonathan Bendiner, economist for the bank said. “Indeed, we expect debt growth to continue to move more in line with income, keeping the debt-to-income ratio stable.”

The latest read on debt came as Statistics Canada reported that the national net worth increased to $6.9 trillion in the fourth quarter, up one per cent from the third quarter of 2012.

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The national net worth is the sum of the net worth of persons and unincorporated businesses as well as corporate and government sectors.

Statistics Canada said higher prices for many assets led the advance, while national saving accounted for 29 per cent of the increase in national net worth.

Household net worth rose 1.4 per cent in the fourth quarter, led by gains in the value of equity holdings and pension assets.

With files from Canadian Press

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