Canada's Housing Bubble

Oct 01, 2010 Michael Babad Globe and Mail

Carney's warning

The governor of the Bank of Canada has been warning Canadians for some time now that they're putting themselves at risk by gorging on debt. Yesterday, he issued his harshest warning so far, Globe and Mail economics report Jeremy Torobin writes.

"This cannot continue," Mark Carney said in a speech in Windsor, Ont., noting that while asset prices rise and fall, debt "endures."

Canadians have used ultra-low interest rates to load up on debt, and the central bank is worried that they'll take on even more given the still-low levels. Eventually, that comes home to roost when rates rise. Given the economic uncertainty and lack of direction of where rates are headed, Mr. Carney is hoping it stops, and he believes consumers are now heeding his advice.

As well, as consumers go on a debt diet and get their finances in order, this will affect the overall economy, leading to what Mr. Carney projects will be "modest" growth.

Household debt as a share of personal disposable income

How serious are his warnings? As the Bank of Canada's numbers show, household debt as a share of personal disposable income has climbed sharply. Still below the rates of the United States and Britain, though getting ever closer, it has topped 145 per cent. Here are some other key facts from the central bank:

• Canadian families have collectively run a net financial deficit for 37 quarters in a row, meaning "their investment in housing has outstripped their total savings for over nine straight years."
• Canadian households are "increasingly vulnerable" to shocks, and that risk is growing more quickly than had been projected.
• Net worth of Canadians is about six times the average disposable income, but the debt-to-asset ratio has climbed to its highest level in more than 20 years.

"While the governor also warned of rising Canadian debt levels, he emphasized the implications for sluggish future consumption growth and also hinted that the responsibility to rein in excessive credit growth will fall not just with the central bank (through higher rates) but also in more direct measures through regulation," strategists Mark Chandler and Kam Bath of RBC Dominion Securities said in a research note today. "However, he also affirmed a belief that mortgage growth is slowing of its own accord."

• Carney sharpens warning on household debt levels