Canadian household debt rising faster than in United States: TD report
By Sunny Freeman, The Canadian Press
canadianbusiness.com
TORONTO - Household debt is rising faster in Canada than in the United States and will continue to climb as low interest rates encourage consumers to spend beyond their means, warns a report from one of the country's largest banks.
Canadian debt loads have become excessive as consumers become accustomed to easy borrowing, TD Economics said in the report released Wednesday. And it believes debt will continue to rise as long as the Bank of Canada keeps its key lending rate at a historically low level.
"We're trying to signal to households that they need to be careful about borrowing in a low-interest environment," said TD's chief economist Craig Alexander.
The report warns that one-in-10 Canadian households are at risk of being unable to meet financial obligations when interest rates rise. Low-income Canadians will be most vulnerable because debt eats up more of their income.
The debt-to-income ratio in the United States hit dismal highs above an estimated 160 per cent during the recession, but those have dropped to below 150 per cent and Canada is quickly catching up.
The Bank of Canada reported Wednesday that a strong housing market, which led the economy out of recession, has contributed to the highest domestic debt burdens in history. Its latest data show the ratio of household debt to disposable income has reached 147 per cent.
And Americans are also saving more than Canadians now — the U.S. savings rate has averaged 5.7 per cent of disposable income in the past year compared to 4.2 per cent in Canada.
"The Canadian debt imbalance is currently not as great as that experienced in the U.S. and does not require a major deleveraging," the report said.
However, "growth in personal debt must slow relative to income growth over the coming years or else the risks of a future deleveraging will increase."
Central bank governor Mark Carney said he's not overly concerned about comparisons with the United States, which he said is in far worse shape and will require more work to return to pre-recession levels.
American personal debt is in a gradual recovery mode, due to a period of deleveraging and home foreclosures. But the U.S. economy is also struggling with high unemployment and dismal consumer confidence coming out of the recession, which has encouraged many to rein in their spending habits and cut up credit cards.
The Bank of Canada repeated warnings about record high debt loads in its latest interest rate announcement Tuesday, when it slashed its forecast for economic growth and held the overnight rate at one per cent.
Alexander said the Bank of Canada's decision to hold interest rates is "perfectly appropriate," given Canada's economic outlook and the rate of inflation.
"But the challenge is, we also have very high personal debt and as a result, we run the risk of households taking advantage of the low interest rates by borrowing more heavily at a time when finances are already pretty stretched," he said.
Canadians need to work to reduce their debts now while interest rates are low and debt servicing is affordable, instead of taking advantage of it to rack up more debt, Alexander said.
"When rates come up to more normal levels, there is going to be a percentage of Canadian households that are impacted by rising debt service costs because they have taken out more leverage in recent years."
In other words, low interest rates in recent years have created an opportunity for many people to spend more than they can actually afford. An ample supply of credit from banks and the easing of mortgage qualifications has made borrowing even easier, the report found.
"Nowhere was the impact of lower borrowing costs and greater household confidence more clearly observed than in the housing market, where ownership rates increased steadily over the past two decades," it added.
And signs for the near term show that those problems could persist as wage increases start to slow.
While debt growth is expected slow to five per cent from eight to 10 per cent in the past decade, income growth will only be about four per cent, meaning debt will continue to rise more rapidly than income.
If debt growth continues to outpace income growth, the debt-to-income ratio could rise from 147 per cent to 151 per cent by 2013, the report warned.
A more healthy debt-to-income level would be 138 to 140 per cent, meaning today's levels are a cause for concern, though they do not signal a looming crisis like that seen in the U.S. where the ratio rose as high as 160 per cent, Alexander said.
However, Douglas Porter, deputy chief economist at the Bank of Montreal believes the recent focus on debt levels overshadows the fact that Canadian savings rates are actually on the mend.
Household assets have rebounded from last year's depths, helped by a rebound in equity markets, record high home prices and a recovery in savings rates that spiked to a nine-year high of 5.9 per cent in the second quarter, Porter wrote in a report Friday.
"A singular focus on debt portrays an overly negative picture of Canadian household finances, which have proven incredibly resilient this cycle and likely still have enough cushion to provide a soft landing for spending in the year ahead," he said. |
