Rate hike isn’t needed: economists

Households are managing debt cycles more responsibly than previously, they suggest

TORONTO – The Bank of Canada should not raise rates in light of growing household debt, because debt levels are already on the way down, say Derek Holt and Dov Zigler, economists at Scotia Capital Markets.

“Instead of hiking to cool debt growth on inflation concerns, perhaps monetary policy will have to remain accommodative for a long time yet as households show signs of having exhausted their peak penchant for debt growth, and with it their appetite for rapid growth in housing and consumer markets, after a long party following the troubles of the 1990s,” they said in a note on Wednesday. The two economists said there is plenty of evidence that debt growth in Canada is slowing despite worries to the contrary. For one, inflationadjusted Canadian mortgage debt growth is climbing at its weakest year-over-year pace in more than a decade and is also on par with the weakness experienced in the 1990s.

“At about three percentage points above inflation now, compared to a peak of 11 percentage points above inflation back in 2008, it is hard to make a convincing argument that household debt growth is now excessive and needs policy attention,” they said.

If anything, Holt and Zigler believe households are managing their debt finances more responsibly than in previous cycles, by using lower-cost credit, such as mortgages and home equity lines of credit, to pay down higher-cost consumer loans and credit cards.

They said concerns about debt levels rely too heavily on the debt-to-income ratio, which compares the total amount of debt financed over much of one’s lifetime to after-tax incomes in one single year.

“(The ratio) in our opinion is the single worst measure of household finances,” they said. It would be fairer, they added, to measure debt levels using consumer debt excluding mortgages since that’s not as mismatched on a debt maturity basis.

“Mortgages are 70 per cent of total household debt and they get financed over much of one’s lifetime,” the economists wrote.

“That makes a comparison of mortgage debt to a single year’s worth of aftertax income a totally flawed measure.”

Ultimately, Holt and Zigler are worried that a rate hike by the Bank of Canada now could lead to a bigger slowdown in debt growth and the country’s housing market than desired, particularly when combined with tighter regulatory and fiscal policy terms.