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Record Canadian household debt ratio fuels concern, warnings

The Toronto Skyline with a condominium building under construction is shown in downtown Toronto
The Toronto Skyline with a condominium building under construction (L) is shown in downtown Toronto, May 14, 2009. REUTERS/ Mike Cassese (Reuters)

By Leah Schnurr and Matt Scuffham OTTAWA/TORONTO (Reuters) - Canadian household debt compared to income rose to another record high in the fourth quarter, reinforcing fears that borrowers and the broader economy will suffer a painful reckoning when interest rates eventually rise. Years of low borrowing costs and rising home prices have contributed to Canadians taking on more debt since the financial crisis, with the central bank keeping interest rates low to support growth. The ratio of household credit market debt to income rose in the fourth quarter to 165.4 percent, meaning that households held C$1.65 ($1.25) in debt for every dollar of disposable income. Over 2015, mortgage debt surged 6.3 percent, the strongest growth since 2011. Experts have long warned of the risk of a painful deleveraging once interest rates start to rise. The Bank of Canada, which cut rates twice last year, is not seen hiking until late 2017. "It's something we may not need to worry about right away but definitely fast-forward the narrative a year, a year and a half, and I think it becomes an exceptional source of concern," said David Tulk, chief Canada macro strategist at TD Securities. For now, borrowing costs remain cheap. The interest-only service ratio was around its record low in the fourth quarter. There have also been concerns job losses resulting from the oil price crash would trigger more loan defaults. Non-mortgage delinquency measures rose in energy-sensitive regions at the end of last year, though rates are still relatively low and national delinquencies have been stable. Scott Hannah, chief executive of Credit Counselling Society in Calgary, fears the rest of Canada will feel the pain that indebted Albertans are feeling now if they don't deleverage. "While they are keeping up with their payments, and while an economist will say 'things are fine,' they are not fine," he said. Laurie Campbell, CEO of Credit Canada Debt Solutions, said the charity's clients were up 5 percent in the fall of 2015 from the previous year. While insolvencies have been near historic lows, she said high debt levels point to problems ahead. "There will be a reconciliation," she said. Brigitte Goulard, Deputy Commissioner of the Financial Consumer Agency of Canada, said the federal agency was keeping a close watch on high-cost payday lending and said borrowers should be changing their behavior. "While interest rates are still low, it's time for consumers to get their financial affairs in order." (With additional reporting by Andrea Hopkins in Toronto; Editing by Phil Berlowitz)