Canadians' disposable income is not growing as fast as their borrowing. Canadian personal debt grew to 163.3 percent of disposable income in the fourth quarter of 2014.
With interest at historic lows and the cheapest mortgages in years, many Canadians are assuming larger debt amounts. Last month five-year conventional mortgage rates fell 4.74 percent, the lowest since records started in 1975. The Bank of Canada cut the interest rate even further in January as the drop in oil prices threatened parts of the economy in areas such as Alberta. New homes prices fell 0.1 percent in January as builders try to entice new home buyers.In January this year according to a Royal Bank study, Canadian household debt grew by 4.6 percent. This is close to the fastest growth in two years. Household debt in Canada was $1.82 trillion in January greater than Canadian GDP which on an annualized basis was below this at $1.65 trillion in January. Much of the debt comes from mortgages that grew 6.3 percent last year. While debt is rising, some forms of expensive debts are being cut back. While Credit card debt did rise by 2.7 percent last year, that is less than the increase in other forms of debt. In January of this year Credit Card debt fell 22 per cent from the month before. Of course, December is Xmas month.However, in the last three months, the amount of personal loans declined by 16 percent as well. Putting the situation in the lingo of finance, Royal Bank of Canada(RBC) economist Laura Cooper writes:Analysts worry that Canada's personal debt is now outpacing that of most developed countries. The McKinsey Global Institute claims that Canada and Australia, together with a number of countries in northern Europe " now have larger household debt burdens than existed in the US or the UK at the peak of the credit bubble" according to their new analysis. The Institute analysis looked at 47 different countries and identified seven with"potential vulnerabilities" including Canada, Australia, Sweden and the Netherlands. The report was based upon data from the second quarter of last year. Since then oil prices have crashed putting Canada's economy even more at risk.Susan Lund, of a McKinsey partner in Washington, said:Canada Mortgage and Housing Corp (CMHC), Canada's federal housing agency, has also issued a warning to the finance ministry back in 2014 about high household debt levels and very high house price levels in some markets. Blacklock's Reporter said the CMHC made these comments in a confidential memo. Blacklock claimed the memo said when it called for a "soft landing adjustment" for the housing market that has been rising quickly because of lower interest rates:
“There is a risk that highly accommodative financial conditions could exacerbate household imbalances as evidenced by the recent strengthening in mortgage accumulation,”As worries accumulate about the long-term health of the economy, businesses are turning to short-term rather than long-term loans. Short-term loans were up 12 percent this year in January compared to last year.
“What the financial crisis showed us is that when you have rising real-estate prices and rising household debt, it can be a deadly mix. You have to manage each carefully,”The Bank of Canada rate cut is a tempting policy designed to spur growth but it makes monitoring of debt levels even more crucial. It might be wise to tighten rules for lending if mortgage debt increases too much. Mortgage amounts have increased as house prices in Canada have risen 89 percent in Canada between 2000 and 2007. Data for Canada may be somewhat warped by the fact that debt of unincorporated businesses in Canada is counted as personal debt whereas in some countries it counts as corporate debt.
"We are, however, concerned about reduced household flexibility resulting from elevated debt levels as well as diversion of capital into residential housing investments, Likewise, elevated prices in some urban markets further compound affordability concerns."The CMHC would not comment on the memorandum.