In recent months Canada’s financial regulators have taken a concerted effort to cool the great Canadian housing boom and slow the pace of record high household indebtedness. There appears to be a strong desire to shift away from a Canadian economy over dependant on household borrowing.

Recent policies aimed at curbing mortgage credit growth, known as the B-20 mortgage guidelines, have been lauded as the most stringent mortgage changes in recent history. The clamp down which comes fully loaded with three Bank of Canada interest rate hikes in less than a year, appears to be working.

National home sales fell 17% year over year in February. Hitting their lowest total for the month of February in the past five years. According the Canadian Real Estate Association price growth has also decelerated for ten consecutive months.

Canada home sales February
Canadian residential home sales in February

Household debt to income also edged down in the fourth quarter of 2017 from 170.5% to 170.4%, while Household credit growth decelerated for three consecutive months, turning negative in January, the first time in over six years.

Canada household debt to disposable income
Canada’s household debt to disposable income dips in Q4 2017. Source: Financial Post

“While it’s too early to tell, we just might have seen the peak in the debt ratio in Q3, as Q1 will no doubt see a sizeable decline due to seasonality,” said Benjamin Reitzes, Canadian rates and macro strategist at the Bank of Montreal.

Instead, the burden will shift towards the public sector with Canadian provincial and federal governments projected to run a cumulative deficit of $31.9 billion in 2017-18.

Bank of Canada Governor Stephen Poloz welcomes the changes, citing
“The federal government’s steps to amass more public debt have helped Canadians avoid an even faster build-up of their personal debt loads, even though such household burdens have still managed to hit historic highs.”

Adding, “It’s always hard to imagine the counterfactual, but if rates had to stay lower for longer that would mean more household debt — and the federal government has accumulated some fiscal debt instead.”

Despite this, Governor Poloz remains cautious in his path towards an orderly deleveraging.

“the economy may be as much as 50 per cent more sensitive to a given rate of interest than it was about a decade ago. Even I don’t know when interest rates may go up again.”

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