The good news is that Canadian household indebtedness has leveled off over the past couple of years, albeit at elevated levels. Other measures of indebtedness (e.g. debt-to-asset ratio and debt-to-net worth ratio) also suggest similar levels of relative stability.

In other words, rising interest rates and tough new mortgage rules have finally achieved for Canadians what many economists have desired -- a halt to relentlessly rising personal debt levels. Canada’s household sector has been deleveraging and reducing its risk exposure to rising interest rates and economic uncertainty. However, the downside of this new-found fiscal responsibility is a slowing consumer credit.

Statistics Canada’s latest National Balance Sheet report indicates that mortgage growth in the second quarter dropped by 33% compared to the same period a year earlier, hitting its lowest level since 2003.

Of course, much of the slowing in mortgage growth was engineered by the Federal Government’s new stringent rules, including expanded “stress tests” for Canadian mortgage borrowers. There is little doubt that household borrowing has cooled as Canadians adjusted to a slew of policy changes including tighter mortgage rules and gradual interest rate hikes.

Although Canada’s five-year mortgage rates are still quite low (about 2.5%), the stress test requires that borrowers qualify for the loan at the Bank of Canada’s higher posted rate — currently 4.64%.

Statistics Canada reported that Canadian households' credit market debt was 169.1% of disposable income in the second quarter of 2018. The ratio was down from 169.7% a year earlier. So, what does the slowdown in credit growth mean for the economy? There are a series of important implications.

When credit is easily obtained, house prices tend to escalate. When credit availability tightens, prices are negatively affected, so there is a vice versa affect at work. Clearly the slowdown in credit growth is not a positive for Canada’s housing industry.

Secondly, retail credit growth and retail spending go hand in hand. This is another sector that will respond negatively to the slowdown in credit growth.

Third, the associated deleveraging that comes with slower credit growth means that the next economic downturn will be managed a bit better by Canada’s household sector than it would have in the recent past when the higher indebtedness still prevailed.

Finally, there is little doubt that credit growth affects economic growth and job expansion. So, in this era of uncertainty, a slower growing Canadian economy seems clearly in the offing.