Household debt levels and skyrocketing home prices may not be as bad as predicted, according to a new study by the National Bank of Canada, one of the country’s largest lenders.
Household debt ratios and the rapid pace of home price growth in Canada aren’t abnormal compared with other countries, states a new report authored by economists at National Bank of Canada. Their study cites data from the federal statistics agency that show the country’s economy is expanding at the fastest pace among the Group of Seven (G7) industrialized nations and that job growth throughout the country is surging.
“After controlling for fundamentals such as employment, population growth, housing tenure, immigration, education and the solidity of the welfare system, our analysis suggests that the ratio of household debt to disposable income in Canada is relatively conservative,” reads the report. “This probably reflects the cumulative effect of all actions taken to date to mitigate the vulnerability of the financial system to household indebtedness.”
Canadians have racked up record levels of personal debt in recent years on items ranging from homes and cars to credit cards and lines of credit – pushing the ratio of household debt to disposable income above 170% and leading some economists to speculate that a bubble is forming for the Canadian household.
Concerns are especially high as the Bank of Canada has raised interest rates in recent months and may continue to do so during the first half of 2018. Bank of Canada Governor Stephen Poloz said in a speech last month that high levels of debt will make the economy more sensitive to higher interest rates today than previously. The new federal mortgage rules that went into effect this month make it harder for certain borrowers to afford a home and could feed through to price growth, which has already cooled in Toronto and Vancouver over the past few months.
Nevertheless, National Bank of Canada says that forecasts of a bubble and looming debt crisis in Canada might be premature. For while cities such as Toronto and Vancouver have seen home prices soar in recent years, and Canada’s debt-to-disposable income ratio is at an all-time high, the numbers don’t seem extreme when compared with other global cities such as London and Hong Kong, which each have higher prices and ratios, notes the report.