A consumer pays with a credit card at a store in Montreal on July 6, 2010. Statistics Canada says the ratio of household debt to disposable income hit a new high in the fourth quarter as incomes increased at a slower pace than consumer borrowing.

Image Credit: THE CANADIAN PRESS/Ryan Remiorz

TORONTO - The ratio of household debt to disposable income hit a new high in the fourth quarter, as rock-bottom interest rates continued to lure more Canadians into the real estate market.

Statistics Canada said Thursday leverage, as measured by household credit market debt to disposable income, reached 163.3 per cent in the quarter.

That means households owed about $1.63 in consumer credit, mortgage, and non-mortgage loans for every dollar of disposable income.

"Some of this is just the natural byproduct of a prolonged period of exceptionally low interest rates," said Bank of Montreal chief economist Doug Porter, noting that long-term interest rates have been hovering near historic lows for some time.

That has made borrowing money — both via mortgages and other types of loans — more attractive for Canadians.

"What we've had is a number of younger people trading in rent payments for mortgage payments," Porter said. "That's one of the factors that's driven up debt over time."

The Bank of Canada's move to chop its overnight interest rate by a quarter of a percentage point in January is likely to add more fuel to the fire in the coming quarters, Porter said, as homebuyers take advantage of reduced mortgage rates.

The highly leveraged Canadian consumer has become a point of concern for policy-makers and analysts. The Bank of Canada said in January, while announcing its rate cut, that high household debt levels and the overheated real estate market leave Canadians vulnerable to economic shocks such as rising interest rates.

And in a commentary posted online Monday, the International Monetary Fund noted that Canada's debt to disposable income ratio is one of the highest among countries in the Organization for Economic Co-operation and Development.

However, economists say the picture is not as bleak as it looks. Although debt levels have been steadily rising, financial assets have risen too, as stock markets have rebounded and Canadians have been putting more away in their savings accounts.

"The debt-to-income measure is not our preferred metric for examining the financial position of Canadian households, most notably as it accounts for only one side of household balance sheets," RBC economist Laura Cooper said in a note.

Economists say the debt-to-income measure fails to take into account the growth in household net worth, which rose 0.9 per cent in the fourth quarter.

On a per capita basis, household net worth was $233,000 in the fourth quarter.

That represents the slowest rate of growth in six quarters, but was faster than the rate at which debt grew.

Porter said low interest rates, which have made it more affordable for Canadians to borrow, have also lifted the value of home prices and stocks, contributing to asset growth.

"Amid the cacophony of warnings, balance sheet repair is in fact quietly underway among Canadian households thanks to a slight rise in savings and long-term equity market gains," Porter said in a note.

"While debt growth has perked up again, with the Bank of Canada’s surprise January rate cut adding fuel to the fire, the expected cooling in the housing market — at least in Alberta — should cap mortgage growth."

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