Canada’s Debt Problem Worsens: Household Debt Eclipses GDP for First Time

In a piece of news sure to roil the Canadians markets, Statistics Canada reported that Canadian household debt exceeded the country’s gross domestic product in the second quarter.

From Bloomberg:

Household debt rose to 100.5 percent of gross domestic product from 98.7 percent in the first quarter, Statistics Canada said Thursday in Ottawa. Credit-market debt such as mortgages increased to 167.6 percent of after-tax income, from 165.2 percent in the first quarter.

Debt levels have surged in recent years following an explosion in property values in Canada’s two most important metro areas. This has caused would-be homeowners to use increasing amounts of leverage to buy homes:

Canada’s central bank and finance minister have said the economy is at risk from record consumer debt burdens and a housing boom in Vancouver and Toronto. British Columbia’s government imposed a new 15 percent tax on foreign buyers last month and the federal finance minister said he’s looking at whether more action is needed following a December move to tighten mortgage down-payment and lending requirements.

Foreign speculators, especially from China, have added fuel to the fire of rising home prices in the Great White North. Regulators and banks are attempting to rein in the housing bubble with higher taxes and tighter lending standards, but as is usually the case, these moves have been reactive, not proactive.

What’s worse, consumer debt is rising at a much faster pace than disposable income:

Total credit-market consumer debt rose 2 percent in the second quarter, faster than the 0.5 percent gain in disposable income.

These trends are bound to catch up to Canadian equities at some point, with banks likely to face pressure from non-performing loans if and when the real estate bubble bursts.

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The iShares MSCI Canada Index ETF (NYSE:EWC) was unchanged in premarket trading Thursday. The largest ETF targeting Canadian stocks has surged 15% year-to-date, more than tripling the S&P 500’s 4.54% rise in the same period.

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