Saturday, December 12, 2009

Ratio of Canadian Household Debt to Income of 140 percent.

Given the low interest rates it is not surprising that Canadian real estate sales are doing well and house prices are rising in contrast to the US. However as this article shows the result of low interest rates is that consumers are piling on debt as well and this may not bode well for the future especially if there are more job losses or a decrease in economic activity.

Increasing household debt stirs concern
Bank of Canada worries about jump in borrowing
By PAUL VIEIRA, Canwest News ServiceDecember 11, 2009
Rising levels of household debt and deteriorating budget balances in several countries will emerge as the most prominent risks to the Canadian financial system over the next few years, the Bank of Canada said yesterday.

In its semi-annual review of the Canadian financial system, the central bank said the level of vulnerability to an adverse near-term shock has declined modestly. Furthermore, the likelihood of a renewed global downturn has diminished since the release of its previous assessment in June.

"At the same time," it warned, "several medium-term risks have intensified."

Two were singled out: rising levels of household debt, perhaps spurred in recent months by consumers looking to take advantage of record-low borrowing costs; and an inability to resolve global trade imbalances, which the bank warned could cause a "disorderly" adjustment in exchange rates.

The central bank said the review is meant to provide an assessment of downside risks that could cause stress in financial markets, even if they are low-probability events.

Nevertheless, it acknowledged the ratio of household debt to income has climbed to "historically" high levels of more than 140 per cent.

"The medium-term risk to financial stability arising from the household sector is judged to have increased," it said. "This judgment is predicated on concerns that the sustained growth of household debt in the context of rising interest rates will increase the vulnerability of households to an adverse shock over the medium term."

Asked yesterday about the issue of household debt, Finance Minister Jim Flaherty told reporters an increase in this area is "to be expected during what has been a serious economic downturn."

He added, however: "Well, you know, we certainly want people to be careful because interest rates are very low now and there's lots of liquidity in the system. There's lots of money being lent and I do ask Canadians to be mindful of the fact that interest rates will not be low indefinitely."

Financial Post

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