A Whiff of Deflation in Canada

Canadians are reducing their debts. Is that good or bad?

Canada’s debt-to-disposable income ratio declined by the most on record in the first quarter of 2018. It fell to 168% from 169.7% the previous quarter, and down from a record 170% in the third quarter of 2017. Mortgage borrowing is the lowest in four years, coinciding with news that Toronto house prices have posted their first annual decline since 2009. Bizarrely, some commentators are viewing this as positive. The argument appears to be that the reduction in debt-to-disposable income is a sign that Canadians will be able to cope with rising interest rates.

However, the driver of household debt is social mood. As the chart shows, the inflation of debt has occurred since 1990, rhyming with a 300% rise in the stock market. Social mood has been trending positively, as reflected in both series. Debt deflation in Canada could be a signal that social mood is now turning negative.