Canada's Housing Bubble

Sep 28, 2010 Monica Gutschi Dow Jones

Toronto -- Canadians are justifiably worried about their rising debt loads.

According to Statistics Canada, household liabilities rose by C$31 billion in the second quarter to stand at a record C$1.48 trillion at the end of June. Meanwhile, household net worth fell for the first time since early 2009, declining by C$34 billion to C$5.9 trillion.

Those changes pushed the household debt-to-asset ratio up to 19.9% and the debt-to-net worth ratio up to 24.9%, each matching all-time highs, RBC Capital Markets noted.

Meanwhile, Scotia Capital has estimated that Canadian households have more debt as a share of total household assets than any other G7 country excepting the U.S. And the trends augur poorly: the U.S. Federal Reserve reported Friday that U.S. household debt tumbled by 2.3% as Americans continue to tighten their pursestrings. Within six months, Scotia Capital says, Canadians will be more heavily indebted than Americans.

Additionally, The Boeckh Investment Report notes the U.S. savings rate has risen to 6.5% while the Canadian savings rate has fallen to 2 1/2%.

No wonder a recent survey by Manulife Bank found the majority of Canadians rank being debt-free as among their top financial priorities. The poll of about 1,000 Canadians discovered that 69% name "debt freedom" as a top financial priority, but also found that most were unable to put much of a dent in their debt load.

Despite record-low interest rates, 29% said their debt increased in the past year. More worrisome, the number of Canadians with more debt is two percentage points higher now than in April, when a similar survey was conducted. Another 17% said their level of debt didn't change much in the past year, and 16% managed to wrestle down some of their liabilities, but not as much as they'd hoped.

Only 8% said they "shaved more than they expected" from their debts in the past year.

Worries about debt was evident in another recent survey, by the Canadian Payroll Association, which found the vast majority of Canadians would pay off their debts first if they won C$1 million in a lottery. That survey also found that most Canadians are living paycheck-to-paycheck and would be in trouble if their pay was delayed by even one week.

This can't continue, says Laurie Campbell, executive director of credit-counseling agency Credit Canada. "The spotlight is on debt right now, and the spotlight is also on the fact that we're not doing much to curb it."

Heavy debt loads--especially with higher interest rates on the horizon-- can create a vicious cycle, she notes. "Some people talk about their debt the way they talk about their diets," Campbell says. "Unfortunately, it's a lifestyle change that people have to make. You can't pay your debt and then go back to old habits."

She suggests people who do want to whittle their debt down to more manageable levels should live more like their parents likely did: bringing their lunch to work and drinking their coffee at home.

"These little expenses can actually add up to big savings," Campbell noted. That C$6 a day could represent an extra C$140 a month to pay down a credit card.

The first step for those serious about reducing debt is to track expenses, so they know where their money is going, Campbell says. After that, she says they should look at what expenses can be eliminated and reallocate that money to paying off liabilities.