Although the Bank of Canada (BoC) began to increase interest rates in July, the expectation that Canadians will curb their growing appetite for debt in tandem has yet to happen, according to a new report from Royal Bank of Canada’s (RBC) economics department.
In fact, Canadian households were adding debt at the fastest pace since October 2011 in July, when the BoC increased its benchmark interest rate by 25 basis points, the report says. It adds that outstanding balances rose by 5.7% compared with July 2016, pushing total household debt to almost $2.1 trillion.
Consumer credit — including lines of credit, personal loans and credit cards — continues to enjoy strong growth, the report says: “An uptrend in consumer credit accumulation has continued relatively unimpeded since early 2016 and is now well above the cycle lows seen in the latter half of 2013 —before the Bank of Canada cut policy rates in response to the crude oil price plunge.”
At the same time, residential mortgage growth also picked up in the first half of 2017, the RBC report states, noting that “The introduction of mortgage qualifying standards by the federal government in October 2016 ostensibly had a minimal dampening effect on mortgage loan growth. Instead robust home sales in early 2017 appeared to drive a strong uptick in mortgage demand earlier this year.”
More recently, home sales have slowed, and this is expected to flow through to mortgage demand in the coming months. In addition, RBC expects interest rate hikes to begin denting the demand for debt eventually as well.
“As support builds for further monetary tightening, the borrowing binge evident in recent quarters is likely to subside,” the RBC report says. “A notable shift in major housing markets alongside elevated household indebtedness and tighter financial conditions are likely to dampen credit growth and eventually temper consumer spending growth.”