Ottawa Citizen

Cana­di­ans bor­row­ing like never be­fore

Per­sonal debt hits record high in 20l2


Scott Han­nah says busi­ness just keeps get­ting busier.

The head of Credit Coun­selling Ser­vices in Van­cou­ver says the num­ber of peo­ple coming for help was up seven per cent this year and there’s no sign that pace is go­ing to let up.

And mak­ing mat­ters worse, the jump fol­lowed a nearly 30 per cent in­crease in 2011.

“Not only did it grow, but we’re see­ing that the av­er­age in­debt­ed­ness of con­sumers con­tin­ues to creep up,” Han­nah said of his clients.

Per­sonal debt lev­els climbed to record lev­els in 2012.

Both Bank of Canada gov­er­nor Mark Car­ney and Fi­nance Min­is­ter Jim Fla­herty spent much of the year warn­ing Cana­di­ans about the per­ils of too much debt.

Lured in part by low in­ter­est rates and trapped in part by a boom­ing real es­tate mar­ket that has driven up home prices in the coun­try’s largest cities, Cana­di­ans have been bor­row­ing like never be­fore.

Ac­cord­ing to Statis­tics Canada, the house­hold debt to in­come ra­tio has risen to a record high of 164.6 per cent in the most re­cent as­sess­ment, ap­proach­ing lev­els reached in the United States be­fore the hous­ing crash of 2007-08.

There are dif­fer­ences be­tween Canada and the U.S. — in­clud­ing a far smaller per­cent­age of sub­prime loans — that sug­gest Canada won’t suf­fer a melt­down of its own, but the money will need to be paid back even­tu­ally.

TD Bank chief econ­o­mist Craig Alexan­der said the high debt-to-in­come ra­tio means Cana­di­ans are vul­ner­a­ble to an eco­nomic shock.

“If you had a sharp in­crease in in­ter­est rates or you had a sharp in­crease in un­em­ploy­ment, Cana­dian house­holds are more vul­ner­a­ble to­day than in the past and it is likely that con­sumer spend­ing, which is about 60 per cent of the econ­omy, would be more vul­ner­a­ble to a correction than in the past,” he said.

How­ever Alexan­der said even if in­ter­est rates rise mod­estly, Cana­di­ans will be able to cope.

“Cana­dian house­holds may slow down the rate of debt growth that they take on in an en­vi­ron­ment where short term rates go up one per­cent­age point, but one per­cent­age point is not go­ing to cause a sig­nif­i­cant delever­ag­ing,” he said.

“The big­ger risk would be an un­em­ploy­ment shock.”

The Euro­pean fi­nan­cial cri­sis, the U.S. fis­cal cliff or a slow­down in the Chi­nese econ­omy all loom as big­ger risks than a po­ten­tial rise in in­ter­est rates.

“Any of th­ese large scale ex­ter­nal shocks could really weaken the Cana­dian econ­omy and if that hap­pened un­em­ploy­ment would go up and then you have a big­ger risk that Cana­dian house­holds could really cut back on their spend­ing,” Alexan­der said.

“But so far we’ve nav­i­gated through the risks since mid-2009 and I think we’re go­ing to con­tinue to do so.”

But Alexan­der says Cana­di­ans still need to mod­er­ate their debt growth. That means the econ­omy will have to look else­where for growth in 2013 af­ter rid­ing the con­sumer, real es­tate and government sec­tors since the re­ces­sion.

Ac­cord­ing to the Of­fice of the Su­per­in­ten­dent of Bank­ruptcy Canada, con­sumer in­sol­ven­cies for the 12 months ended Sept. 30 were down 5.2 per cent com­pared with the pre­ced­ing 12 month pe­riod. But the num­bers don’t tell the whole story — while con­sumer bank­rupt­cies were down 10.7 per cent, con­sumer pro­pos­als in­creased by 4.7 per cent.

Han­nah said this is a sign bor­row­ers are seek­ing help ear­lier, but noted that it is also a sign that they may not be able to ac­cess other al­ter­na­tives such as con­sol­i­dat­ing their debt with a new loan.

Tighter mort­gage lend­ing rules, which placed new re­stric­tions on home eq­uity lines of credit, could be a rea­son, he said.

“It has been scaled back now. So that has an im­pact on some con­sumers as well. They can’t keep us­ing their house as an ATM ma­chine,” Han­nah said.

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