Canada's Housing Bubble

Sep 30, 2010 Michael Babad Globe and Mail

Carney warns on debts

Bank of Canada Governor Mark Carney warned Canadians today to curb their enthusiasm for debt. Using particularly strong language, Mr. Carney said in a midday speech that the ratio of household debt to disposable income hit 146 per cent in the first quarter of the year, a record and a level that is closing in on that of the U.S.

"This cannot continue," the central bank chief warned, adding that while the net worth of Canadians is about six times the level of average disposable income, asset prices rise and fall but "debt endures." And despite the "buoyancy" of the real estate market, the debt-to-asset ratio among Canadian households is at its highest in more than two decades.

"With Canadians working, but not as much as they would like, they have been borrowing," Mr. Carney said. "Real household credit expanded rapidly throughout the recession, in contrast to previous downturns, and has continued to grow through the recovery. Canadian households have now collectively run a net financial deficit for 37 consecutive quarters. That is, their investment in housing has outstripped their total savings for over nine straight years. In effect, households are demanding funds from the rest of the economy, rather than providing them, as had been the case through the 1960s, 1970s, 1980s and 1990s."

Household balance sheets are growing "increasingly stretched," and it's possible Canadians are beginning to address the issue.

• Read the speech

Carney warns of slowing growth

Mr. Carney also told the audience in Windsor, Ont., that the economy will grow at a "modest pace" going forward given the headwinds from abroad and as Canadians try to tackle those personal debts.

While Canada’s recovery has been the envy of the Group of 7, it has relied on levels of consumer spending and investment in housing that are proving unsustainable, Mr. Carney said. Both areas of the economy have slowed since the first quarter of this year as interest rates began climbing again and as worries mounted over the health of Canada’s main export market.

• Carney warns of 'modest' growth