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Canadian household debt at record high, inflation stalls

Canadian household debt at record high, inflation stalls

NEW YORK — Household net worth in Canada climbed to a record high of $10.5 trillion in the first quarter of 2017 compared to the fourth quarter of last year, RBC Economics reported.

The debt-to-income ratio edged down to 166.9 percent from 167.2 percent in the fourth quarter, but after adjusting for seasonal factors, the metric rose to 167.8 percent.

Another $245 billion was added to household assets in the first quarter reflecting a strong gain in financial assets that were up $148 billion following a $47 billion gain in the fourth quarter. Non-financial asset values rose $97 billion in the first quarter, compared to a $113 billion bump at the end of last year.

Household asset values reached $12.6 trillion in the first quarter with real estate accounting for just more than 40 percent. Households owed $2.07 trillion in debt to start 2017 with $1.34 trillion tied up in mortgage loans.

The pace of debt accumulation was surpassed by that of both assets and net worth to drive the credit market debt-to-asset and debt-to-net worth ratios to their lowest points in a decade at 16.2 percent and 19.4 percent, respectively, said Economist Laura Cooper.

Owners’ equity as a  percent of residential real estate climbed to a pre-recession high of 74.6 percent. Household mortgage principal payments as a share of income surpassed mortgage interest payments for the first time since records began in 1990, she explained.

“Today’s snapshot of Canadian household finances is underwhelming given its resemblance to earlier releases — a new record level of household debt offset by rising asset values driven by housing and financial market performance,” said Cooper. “Even the downtick in the debt-to-income ratio is of little fanfare as it reflects a seasonal slowing in debt accumulation in the quarter rather than an improvement in household balances.

“The value instead is the baseline for how households are positioned heading into a looming tightening cycle. As the economy gathers momentum and earlier interest rate cuts have largely done their work, the Bank of Canada has shifted their tone, prompting markets to price in an 80 percent chance for a rate hike by the end of the year,” she added.

“We expect that muted inflation and uncertainty emanating from U.S. policy will keep the bank on the sidelines until next year,” said Cooper. “But rate hike chatter was amplified yesterday following Governor Poloz’s comments that households need to consider what their finances would look like if interest rates were to be a little higher.

“The cost of servicing debt has remained broadly unchanged in recent years, but households’ sensitivity to rate hikes is likely greater now than it has been in previous tightening periods,” she explained. “Principal payments take a greater share of disposable income than interest costs, at least for now, and interest payments on non-mortgage debt exceed mortgage interest. That’s despite it accounting for only one-third of total debt.

“Non-mortgage debt tends to command higher borrowing rates and variable payments, leaving households increasingly vulnerable to a looming uptrend in interest rates,” she noted. “Encouragingly, higher rates will reflect a strengthening economy, and attendant income gains are expected to support households’ ability to absorb higher costs. But vulnerabilities continue to brew under the surface of the headline $10.5 trillion in household net worth.”

Slower-than-expected U.S. inflation won’t affect the Fed’s decision later today

The all items Consumer Price Index unexpectedly fell 0.1 percent in May to bring the year-over-year rate down to 1.9 percent from 2.2 percent in April.

Energy price inflation moderated to 5.4 percent year-over-year as gasoline prices fell for the third time in four months. A 0.2 percent monthly rise in food prices provided some offset in May as that component continued to emerge from a period of deflation late last year.

The year-over-year rate of inflation excluding food and energy fell to 1.7 percent from 1.9 percent, the slowest rate in more than two years, said Economist Josh Nye. Core prices have been roughly flat over the last three months, the weakest streak since 2010. Falling goods prices and weaker-than-usual services inflation have both been factors.

Some transitory factors have been at play, including a decline in the price of wireless phone services, though underlying inflation does appear to have moderated in recent months, he explained.

“U.S. inflation fell short of expectations for a third consecutive month in May.  We don’t see today’s shortfall impacting the Fed’s decision to raise rates this afternoon, a move that is universally expected and fully priced in by markets,” said Nye.

“But, the recent moderation in inflation could lend a more dovish tone to Federal Reserve Chair Janet Yellen’s press conference,” he explained. “Minutes of the Fed’s May meeting indicated most participants viewed the recent softer inflation data as primarily reflecting transitory factors.

“However, a further decline in core inflation and less upward pressure from energy prices should leave the committee less comfortable with that view,” said Nye. “Continued moderation in market-based measures of inflation expectations, now back at pre-election levels, could also have some bearing.

“Offsetting slower inflation is further tightening in labour market conditions that indicates limited slack in the economy and the potential for price pressure to pick up going forward,” he added. “With that in mind, we expect the Fed will take the long view on inflation and continue to signal that a gradual withdrawal of accommodation is appropriate beyond today’s move.”

SOURCE: RBC Economics press release

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About Greg Gerber

Greg Gerber is a freelance writer and podcaster who has been writing about the RV industry since 2000. He is the former editor of RV Daily Report.

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