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30 Mar

Canadians’ net worth hits record level

General

Posted by: Mike Hattim

Household debt as measured against disposable income nudged lower from a record high in late 2010, data suggested Monday, a sign that Canadians are beginning to curb their borrowing behaviour.

Still, analysts warned debt levels remain at such elevated levels that they would squeeze economic growth for years to come.

Statistics Canada reported that, as of the 2010 fourth quarter, household debt as a percentage of after-tax income dropped to 148.7% from 148.8%, as a 1.8% gain in disposable income outstripped growth in mortgages and other consumer loans.

Household liabilities in the quarter expanded 6.5% from year-ago levels, the slowest annualized growth rate experienced since the fourth quarter of 2002. Households cooled borrowing on all major types of credit, with growth in non-mortgage loans — at 5.8% year-over-year — representing the slowest advance since the mid-1990s.

Meanwhile, the data agency said the market value of households’ net worth, which takes into account real estate, stock portfolios and other cash on hand, increased 2.2% in the October-to-December period to $6.2-trillion, following a 3% advance in the third quarter. A 9% fourth-quarter gain in the benchmark Toronto stock index helped power the advance in net worth, Statistics Canada said.

As a result, Canadians’ net worth hit a record in the fourth quarter, 4.1% above the pre-recession peak set in the second quarter of 2008, and nearly 15% above the trough recorded at the height of the global credit crisis in early 2009.

Nevertheless, most eyes were on updated household debt figures, given the repeated warnings issued by Bank of Canada governor Mark Carney. The concerns prompted the federal government to introduce, for the third time in as many years, tougher rules regulating mortgage-lending standards in an effort to curb how much debt Canadians were willing to take on.

To that end, the amount of household debt on a per-capita basis climbed in the fourth quarter, to $44,500 from $43,900, although at a pace that trailed the gain in net worth.

Carlos Leitao, chief economist at Laurentian Bank Securities, said elevated household debt levels are likely to become a “legacy” of the recession, in which central banks lowered their benchmark interest rates to near zero.

The debt “will constitute a break, or weight, on economic growth for the years to come,” he said. “This is not going to go away anytime soon.”

Since the trough of the recession, household credit grew at roughly twice as fast as personal disposable income, which helped Canada avoid deep losses from the recession. Mr. Carney’s repeated warnings are, in large part, an attempt to make Canadians aware of their debt levels in the event interest rates start climbing again. Higher rates will ultimately force households to set aside additional income to pay off monthly financing costs, and thereby reducing income available to spend on consumer goods.

Others, however, had a more upbeat view of Monday’s data. Economists at Royal Bank of Canada suggested the “slight” moderation in the pace of household debt growth and an improvement in household leverage ratios “will go some way to ease market concerns over [consumer] debt loads.”