Think a cooler Canadian housing market means household debt is on the decline? Think again

After reaching a record level of activity in the spring of 2017, the Canadian housing market has cooled considerably over the past few quarters. But that doesn’t mean that Canadians are out of the woods when it comes to household debt, according to one economist.

“Risks around housing appear to have dissipated with the national market stabilizing in recent months,” writes BMO senior economist Benjamin Reitzes, in a recent note. “[But] household debt is an issue that isn’t going to be resolved anytime soon.”

While Canada’s debt-to-disposable income ratio eased from 169.7 to 168 per cent in the first quarter of 2018, Canadians still have some of the highest debt levels in the world.

“The [Bank of Canada] is continuously collecting data on how households are coping with rising rates, while the macro data suggest the moves have been manageable thus far,” writes Reitzes. “The slowing housing market and new mortgage rules have caused debt growth to decelerate, but it’s going to take time to work off debt burdens and bring debt ratios down.”

Earlier this year, Capital Economics chief North America economist Paul Ashworth warned that Canadians shouldn’t become complacent about their household debt levels, which remain worryingly high.

“[The drop in the debt-to-disposable income ratio] was greeted by some as confirmation that the Bank of Canada had somehow engineered a soft landing in the housing market,” he wrote. “It hasn’t.

Ashworth pointed to the Bank of Canada’s June Financial System Review as evidence of the problem. In the review, the Bank admitted that the size of the outstanding debt would mean that vulnerability “will persist at an elevated level from some time.”

“All things considered, we wouldn’t pay much attention to the miniscule drop back in the debt-to-income ratio,” wrote Ashworth.

What does all this mean for the housing market moving forward? Well, for one thing, the BoC will likely wait to at least October to hike the overnight rate, which currently sits at 1.50 per cent.

“Barring a big burst of sustainable income growth, elevated debt burdens will keep the Bank patient,” writes BMO’s Reitzes.

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