Household debt-to-income ratio should winding down: central banker Wilkins

OTTAWA — A top Bank of Canada official says she expects the country’s high levels of household debt relative to disposable income to gradually start winding down.

Speaking before a parliamentary committee, senior deputy governor Carolyn Wilkins says the central bank is seeing a slowdown in credit growth for both mortgages and other forms of household debt at a time when labour income is moving higher.

Wilkins says over the coming years the ratio of household debt to disposable income should stabilize — although she expects it to take time, since the accumulation itself was a long process.

The latest figure for the household debt ratio shows Canadians’ burdens have remained in record-breaking territory at 170.4 per cent — which translates to just over $1.70 in debt for debt for every dollar of disposable income.

The reading for the final three months of 2017 was a slight decrease from the ratio’s historical peak of 170.5 per cent the previous quarter, a downturn some analysts believe could suggest Canada’s debt growth may have turned a corner.

Wilkins says the debt buildup has included asset purchases such as housing, therefore Canadians have also benefitted from higher net worths — which she believes is a more reassuring story.

The debt ratio is a popular measure for policy-makers, but some experts see it as just one number out of many. They insist consideration must also be given to the composition of the debt, such as how much of it is high risk.

“Household debt to income has been rising for quite a number of years and, in fact, since the early 2000s,” said Wilkins, who appeared at the committee alongside Bank of Canada governor Stephen Poloz. 

“And so, for what took such a long time to build up, it’s going to take a bit of time to wind down.”

The ratio has been steadily rising since 1990, when it was 90 per cent.

The Bank of Canada has carefully assessed the economic risks of consumer debt in order to determine how quickly it can raise interest rates without piling on too many debt-servicing costs for over-stretched households. The central bank, which has raised rates three times since last July, has called Canadians’ debt burdens an area of top concern.

On Monday, Poloz said Canadians’ high debt loads has likely made households 50 per cent more sensitive to interest rate movements.

Andy Blatchford, The Canadian Press