Canada debt-to-income hits record as consumers face higher rates

By Leah Schnurr OTTAWA (Reuters) - Canadian household debt as a share of income hit a record in the second quarter as consumers spent more on durable goods, pointing to the challenges that could lie ahead for the economy as interest rates rise. The ratio of debt to disposable income rose to 167.8 percent from a downwardly revised 166.6 percent in the first quarter, Statistics Canada said on Friday, meaning Canadians had C$1.68 of debt for every dollar of income. While the report did not capture the effects of interest rate increases by the Bank of Canada in July and September, economists and policymakers are watching closely to see if heavily indebted consumers will be able to sustain higher interest payments. "Certainly it's confirming that debt levels remain high and (are) creeping up a little bit higher. That's been an ongoing vulnerability for the Canadian economy," said Paul Ferley, assistant chief economist at Royal Bank of Canada. While higher interest rates are likely to dampen current strong consumer spending and could trip up some borrowers, most households should be able to cope, Ferley said. Others fear a more dire situation if borrowing continues to outpace wage growth. "Canadians continue to 'tread water' and are at risk of reaching their tipping point where they can no longer manage their debt payments," says Scott Hannah, president of the Credit Counselling Society. On a seasonally adjusted basis, households borrowed C$28.9 billion ($23.8 billion) in the second quarter, up from C$25.4 billion in the preceding quarter. While mortgages made up more than half of this, the amount of borrowing to buy a home declined to C$16.5 billion from C$19.2 billion, the first decrease since the third quarter of 2016. The pullback could help address some of the affordability issues in markets where prices have surged, said Ferley. Separate data showed Canadian home resales bounced back in August after four straight monthly declines, suggesting the cooling market may be stabilizing, but forecasts for sales and prices for this year and next were lowered. Consumer credit and other non-mortgage loans jumped to C$12.3 billion from C$6.2 billion as Canadians increased their spending on durable items. Auto sales have been on a hot streak this year, putting Canada on track to hit a record this year. The debt service ratio, which measures debt principal and interest payments as a proportion of income, was flat at 14.2 percent. (Additional reporting by Andrea Hopkins; Editing by Jeffrey Benkoe)