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Canadian household debt-to-income ratio hits record high

By David Ljunggren

OTTAWA (Reuters) - The ratio of household debt to income in Canada hit a record high in the second quarter, although the pace of growth slowed from the same period in 2012, Statistics Canada said on Friday.

The federal government and the Bank of Canada have expressed concern that Canadians are taking on too much debt - in particular cheap mortgages - at a time when interest rates are at near record lows. Officials fret that when rates go up eventually, some consumers could find themselves in trouble.

The ratio of household debt to income rose to 163.4 percent in the second quarter from 162.1 percent in the first quarter. The rise in the ratio followed two consecutive decreases.

Analysts said it was too early to draw conclusions from the latest data, noting the second quarter is traditionally a busy one for home-buyers. One suggested Canadians could be rushing to buy property as mortgage rates show signs of rising.

In May, Bank of Canada Governor Stephen Poloz said he saw signs of a constructive evolution in household debt. The bank, which has held rates steady since September 2010, said last week it would withdraw stimulus measures at an unspecified time in the future.

"What the Bank of Canada has described as a 'constructive evolution' of household balance sheets still appears to be unfolding, but the modest deterioration in the second quarter and the recent pop in home sales raise some doubts," said Doug Porter, chief economist at Bank of Montreal.

"The lingering question mark on this front is one reason the Bank of Canada has doggedly maintained its mild tightening bias," he said in a note to clients.

The head of Bank of Nova Scotia (Toronto:BNS.TO - News) said last week policymakers should raise interest rates if they fear a bubble is forming in Canada's housing market rather than imposing more regulations on the country's big banks and mortgage lenders.

Canadian authorities have tightened mortgage rules four times since 2008 to cool the housing market, and on Monday, Finance Minister Jim Flaherty said he was comfortable with the way the market had evolved. Flaherty's office did not respond to a request for comment on Friday.

Housing prices climbed to a record high in August, although the annual price increase remained subdued, according to data released on Thursday.

The previous record Canadian household debt to income ratio was 162.8 percent, recorded in the third quarter of 2012.

The ratio in the second quarter increased by 1.3 percentage points from the first quarter, or 0.8 percent. In 2012, the equivalent second quarter increase was 1.5 percentage points, or 1.0 percent.

RBC Economics economist David Onyett-Jeffries said the increase in the second-quarter ratio "largely reflected the seasonal bounce in mortgage borrowing in the spring that is associated with the higher volumes of housing market activity during the peak home sales season".

Jimmy Jean, strategist at Desjardins Capital Markets, said that to some extent the increase in the debt ratio represented "some households rushing home-buying decisions as rates began to move up".

He added in a note: "The idea of a gradual realignment going forward thus remains valid and we do not expect the Bank of Canada to show more concern than in the past."

Mortgage borrowing led the demand for credit in the second quarter, rising by C$18 billion ($17.4 billion) to a total of just over C$1.1 trillion.

National net worth in the second quarter rose 3.1 percent to C$7.31 trillion from the first, as the value of residential real estate helped boost national wealth and net foreign indebtedness declined.

Separately, Statscan said Canada's industries operated at 80.6 percent of capacity in the second quarter, down slightly from the 80.8 percent recorded in the first quarter.

($1=$1.03 Canadian)

(Reporting by David Ljunggren; Editing by Peter Galloway)