A Shift in Household Behavior: Reduced Debt Appetite
Recent fourth-quarter national balance sheet data from Canada paints a picture of households hunkering down, sharply reducing their appetite for debt, and the Bank of Canada facing pressure to cut rates sooner and harder than its US counterpart. This development has significant implications for the loonie and the broader economy.
Household Net Worth: A Mixed Picture
While the stock market rally contributed to a 1.8% quarter-over-quarter increase in household net worth, reaching $16.4 trillion, this growth merely retraced the third-quarter decline. Notably, this level remains 2.3% below the peak in the first quarter of 2022.
Equity Ownership and Residential Real Estate: Shifts in Asset Values
Equity ownership on consumer balance sheets jumped 6.1% to a record-high $4.45 trillion, but this was offset by a surprising 1.8% pullback in residential real estate. This sector has now deflated roughly 8% from its peak in the first quarter of 2022.
Household Debt: A Decline in Burden
On the liability side, the ratio of household debt to net worth dipped to 18% from 18.2% in the third quarter and is now below the pre-COVID-19 norm of 20%. Total credit market debt relative to disposable income has declined in each of the past three quarters.
Year-Over-Year Trend in Household Debt: A Collapse
The year-over-year trend in household debt has collapsed to a little more than 3% from nearly 7% a year ago. This marks the first time since 1990 that credit demand has run this soft.
Household Savings Rate: A Rise to 6.2%
The increase in the household savings rate to 6.2%, nearly triple the pre-COVID-19 normalized level of closer to 2.2%, reinforces the disinflationary move toward shoring up debt-laden personal-balance sheets.
Excuses for High Policy Rates: Fading Away
As pressures on inflation fade away, so do the excuses around keeping the policy rate unsustainably high. With the share of household-sector debt-servicing costs being absorbed out of after-tax income remaining at punitive levels of 15%, it’s clear that the Bank of Canada must act.
Debt-Service Ratio: A Recession-Led Predictor
There has never been a time when a debt-service ratio this high failed to precipitate a recession. With the debt burden so onerous, the ratio is higher today than it was in the summer of 1990 (12.7% back then) when the policy rate was sitting at 13.5%.
Conclusion: A Call for Action from the Bank of Canada
The current environment demands that the Bank of Canada cut rates sooner and harder than its US counterpart. With a debt-service ratio this high, there’s never been a time when failing to act didn’t lead to recession.
David Rosenberg, founder and president of independent research firm Rosenberg Research & Associates Inc., notes: "This is what a decade-long runaway debt bomb creates: an environment where a five per cent policy rate feels more like 13.5 per cent."
A Call to Action
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