Canada's Housing Bubble

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Canadians continued to heap on debt in first quarter Print E-mail

April 12, 2012 Staff

Canadians continued to pile on debt despite dire warnings from financial experts and the central bank about cheap borrowing costs, a new study says.

Non-mortgage debt was up 3.4 per cent year-over-year in the first quarter and new loans rose by about one per cent, Equifax Canada's quarterly consumer credit study showed.

The biggest increase in debt was for auto finance loans and leasing, which grew by 10 per cent compared to this time last year, the study released Thursday said.

"Interest rates are still obviously very low so people are still borrowing, but I don't know if it's a good or a bad news story," said Nadim Abdo, vice-president of consulting and analytical services at Equifax Canada.

"It is not surprising to see consumer credit continue to increase given the significantly improved levels of consumer delinquencies and bankruptcies witnessed in the last year, coupled with record-low consumer borrowing rates."

The Bank of Canada has kept interest rates low since the 2008 recession to stimulate spending. The overnight rate that affects prime rates at banks remains at one per cent.

Canadians have been warned that too much borrowed money could spell trouble at some point, especially with interest rates set to rise as the economy picks up steam.

The central bank has said household debt – now above 150 per cent of income – is the number one domestic risk to the economy.

The growing debt problem and Canadians' apparent addiction to cheap money recently prompted the bank's governor, Mark Carney, to consider intervening in the economy in "exceptional circumstances."

The bank's own analysis states household debt is likely heading even higher, perhaps up to 160 per cent of income – the level reached in the United States prior to the 2008 financial crisis.

What worries Carney is if house prices fall, Canadians could find themselves in a situation where their assets decline as interest rates and mortgage costs rise.

A bank study showed that when interest rates return to "normal," at least 10 per cent of Canadians are vulnerable.

The federal government has attempted to slow the rate of debt by tightening mortgage-lending rules as well.

But experts warn of a housing bubble in Canada that could correct itself and devalue a lot of real estate, particularly in hot markets like Toronto and Vancouver.

However, there are some positive signs on the horizon.

Credit card debt was down by 2.1 per cent year-over-year and has been on a downward trend for the previous six quarters.

Bankruptcies have also decreased by 3.1 per cent since this time last year.

The Equifax study did show that demand for new credit by consumers across the country is about three per cent less than it was before the recession.

The study's credit seeking index calculates the number of consumer credit applications in a given period of time and then compares them to 2007, a timeframe considered to be "normal."

"There's no deleveraging, Canadians are increasing their debt," Abdo said.

"(But) they're not applying for new credit as much as they had in the past because I think what's happening is since we're seeing an increase in indebtedness, people are using the lines of credit they had before . . . they're being smarter about how they spend their money because they have the facilities to do that."

He said it was hard to know whether Canadians adding to debt to their households will be able to pay the bills once interest rates start rising.

Consumer loans make up about 27 per cent of Canadian bank assets and 26 per cent of revenue.

With files from The Canadian Press

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