CMHC warns on household debt

Canada Mortgage and Housing Corp. cautioned that Canadians need to be “vigilant” about growing levels of household debt, noting ramped-up use of personal lines of credit and increasing debt-to-disposable income ratios.

“Household financial vulnerability remains a serious issue that merits close attention going forward,” the CMHC said in its annual Housing Observer report published Thursday.

Personal lines of credit have been increasing at double-digit annual rates since 1986, growing at a faster rate than any other sub-component of household debt, the report said, and represented just over 25% of household debt held by chartered banks in 2010, up from about 3% in 1986.

“It is important that consumers and stakeholders continue to be vigilant in monitoring both the magnitude as well as the composition of household debt and take appropriate action,” said the CMHC, which is the government-owned provider of mortgage insurance.

Residential mortgages, meanwhile, continue to account for the largest chunk of Canadians’ total household debt, representing 68% in 2010, compared with a low of 63% in 1971 and a high of 75% in 1993.

Over the 2001 to 2010 period, mortgage debt has fluctuated between 69.0% and 67.7%, the CMHC said.

The report noted that most Canadians could handle some level of economic adversity owing to “the high quality of mortgage credit in Canada, the substantial equity position of most Canadian homeowners with a mortgage, and households’ ability to adapt their discretionary spending.”

The federal government has intervened to tighten mortgage rules three times in recent years and the report noted the latest changes “will further reinforce the stability of the Canadian housing market.”

However, the CMHC cautioned that major challenges to Canadians’ ability to pay their mortgages could come through job losses, another recession or rising interest rates.

The ratio of debt-to-disposable income has also been increasing at a rapid pace, fuelling concerns about the levels of indebtedness.

Compared to annual disposable income, household debt stood at 150.6% in the second quarter of 2011, a record high, the CMHC noted.

The report pegged the low-interest rate environment and rising income and net worth — which allow Canadians to borrow larger amounts — as factors in this trend.

Finally, the number of Canadian households considered “financially vulnerable” increased to about 6.5% in 2010, still lower than levels seen in 2000 and 2001, but slightly above the 12-year period from 1999 to 2010.

The Bank of Canada applies this term to households that spend 40% or more of their gross income on total debt payments and the number tends to increase as the economy and employment weaken, the report said.