• Growth in overall household credit is stabilizing at a relatively elevated level of 11%(year-over-year). This trend, however, masks an accelerating growth in mortgage loans and a decelerating growth in consumer credit.
• Importantly, non-bank mortgage providers have seen their mortgage business rising much faster than banks — a trend that suggests that the current wave of growth in mortgage outstanding might be of a somewhat higher risk profile.
• The softening growth in non-mortgage consumer debt reflects a notable slowing in the pace of growth in personal lines of credit and a decline in the direct (term) loans portfolio.
• During the first quarter of 2006, overall household debt rose by 2.4% while personal disposable income rose by 2.1%. This led to a moderate increase in the debt-to-income ratio during the quarter. Over the past year, the debt-to-income ratio rose from 114% to 119%. The ongoing improvement in income growth (which reflects strong job gain and improved employment quality) and some softening in credit growth suggest that the debt-to-income ratio will start stabilizing soon.
• At the same time, the debt service ratio, as measured by debt interest payments as a share of disposable income, was hardly changed as the increase in income worked to offset the increase in interest payments.
• As for the debt-to-asset ratio, it was unchanged in the first quarter but it is 3 points higher than it was last year. This means that the value of household liabilities is rising faster than the value of their assets. Net worth as a share of disposable income has also softened during the quarter.
• The cumulative number of consumer bankruptcies fell by 2.3% during the year ending May 2006. Note, however, that bankruptcies in Alberta fell by 18.5%.
• Overall economic growth is projected to average 2.9% in the coming six months, a bit slower than the first half of 2006. Note that we expect consumer spending to start showing some softening in late 2006 and into 2007, reflecting a delayed reaction to higher interest rates and continued softening in the housing market.
• Note that the national GDP number continues to be irrelevant given the significant regional economic divergence: the west vs. the rest. Furthermore, given the different structural make-up of the provinces, higher interest rates are most powerful where they are least needed (Ontario, Quebec) and are much less effective in booming areas (Alberta).
• Overall, we believe that the Bank of Canada is very close to the end of the tightening cycle. And if history is a guide, we might see a moderate downward pressure on rates in mid-2007.
