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  • KPB & Co Research

Over the last 3-years, Canada's monetary and fiscal authorities have implemented a number of initiatives to cool the rapid expansion of household debt. The Central Bank of Canada increased their benchmark rates to 1.75% marking the fifth increase since early 2017. In addition to the increase in benchmark interest rates, new mortgage stress test requirements were implemented, and other restrictions at the municipal and provincial levels were put in place. Since then, there have been a significant improvement in the quality of the stock of household debt, according to the Bank of Canada, but has the pace of overall debt accumulation slowed?

Insured Residential Mortgages Have Been Declining

It appears that more stringent mortgage rules have led to a reduction in the total amount of insured residential mortgages outstanding. The maturity profile of insured residential mortgages have remain uniform since mortgage rules have been implemented, indicating that there have been a uniform reduction in debt across the major maturity buckets.

Uninsured Residential Mortgages Have Been Increasing, with Longer durations

The amount of uninsured residential mortgage loans outstanding has been increasing since July 2016, in spite of the new mortgage rules. Households are also taking on an increasingly more fixed rate loans with terms of 3 years and over. Surprisingly, the proportion of variable rate loans are also increasing relative to total amount of uninsured mortgages. With the maturity profile of mortgage loans extending, lending institutions are taking on more interest rate risks, in a rising rate environment. On the positive side, expanding variable rate mortgages can offset some of the interest rate sensitivity.

Consumer Credit GrowTH Has Been Less Pronounced BUT Growing at 7.5% P.a.

Data from Statistics Canada show that consumer credit growth has been fairly stable since July 2016, on account of fairly stable growth in secured lines of credit. All the other consumer credit categories have been relatively flat over the period. The increase in the secured line of credit partly reflects the boom in housing as consumers borrow against the equity in their homes.

Household Debt to Disposable Income Highest in 28 Years

Canada's household debt relative to Disposable and discretionary income has been on a steady rise for the last 28 years. However the pace of increase in debt ratios accelerated after Q3-2001. Over the 10 years from Q1 1990 to Q3 2000 the debt to disposable income ratio went up by 22 percentage points, however from Q3-2000 to Q4-2010 ratio went up by 50+ percentage points. The debt continues to grow even today albeit at a slower pace.

Policy makers continue to evaluate whether additional restrictions are needed for the mortgage market. The Central Bank of Canada has pointed to a slowdown in the pace of price increases in once hot real estate markets as a potential signal that the mortgage market will begin to decelerate. As the economy goes into unknown territory, the best case scenario for the real estate market and the economy is a gradual de-leveraging process.

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