Canada, the commodities backed economic power to America’s north, continues to power forward ignoring the economic doldrums that have handicapped its southern neighbour.
There are many reasons why. Canada didn’t have a housing or banking crisis in 2008, and while it may be hinting at a housing bubble now, it has yet to deflate.
But the bounce back may be built on a debt problem similar to the one to its south.
As a result, during 2009 and 2010, household credit growth has averaged close to 7.5% y-o-y, sending household debt to a record 148% of disposable income, much higher than in the US (Figure 1). Even though credit growth has slowed recently it is still growing faster than income, which has increased by about 2.7% y-o-y over the past two years.
About three-quarters of the credit growth comes from an increase in residential mortgages, which also include home-equity lines of credit…According to calculations by the Bank of Canada, home-equity lines of credit have risen about twice as fast as mortgage debt in the past year and now represent 12% of total household debt.
Now worse than America’s debt problem, the Canadian version is starting to scare its central bankers. The bank is scared to raise rates, according to Nomura, for fear it would cause serious problems for the country’s heavily indebted populace.
The debt- service ratio is currently relatively low at 7.2% (Figure 2). However, this is the result of low interest rates, and the debt-service ratio will likely increase quickly towards and beyond its recent peak as interest rates increase.
Nomura does expect a rate hike in May, and new moves from the government to limit loan growth. But they do think its possible, in this Canadian election year, it may not occur.
Canada’s debt situation, from Nomura: