Canadians spend their way to top of debt heap, report says

Canadians spend their way to top of debt heap, report says

Owe Record $1.4t 

 

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Photograph by: Andrew Barr, National Post, Financial Post

 

Canadians are among the most profligate spenders in the developed world, a new report says.

Helped by rock-bottom interest rates, consumers have been borrowing at unprecedented levels and now owe a record $1.41-trillion, putting Canada in the number one spot among OECD nations in terms of consumer debt to financial assets, says a study by the Certified General Accountants Association of Canada.

That equates to $41,740 for every individual man, woman and child, or about 2.5 times the level of debt in 1989.

Particularly remarkable is that much of this borrowing took place over the past two years when the country was still in the grip of one of the worst economic downturns in 50 years, the report said.

A significant chunk of the debt is related to residential mortgages, and while Canadians have been borrowing less to pay for homes over the past two years, they have been spending more on just about everything else so the total debt level continued to grow.

The CGAAC is only the latest group to raise a red flag over ballooning consumer debt levels in Canada. Last fall Moody’s Investors Service warned that consumer borrowing in this country was at record levels and appeared to be following the same trajectory as the United States before the real-estate crash.

One reason for the increased borrowing is that interest rates are close to the lowest they have been in more than a generation, part of the Bank of Canada’s response to the financial crisis.

During the turmoil the federal government bought more than $65-billion of residential mortgages from the banks, providing additional incentive to lend.

The easy access to credit helped fix the liquidity problem in the Canadian financial system but it had other consequences as well, such as encouraging consumers to borrow more, especially to pay for houses, which in turn drove up housing prices.

With the Bank of Canada expected to start raising rates this year, the fear is that many of those heavily leveraged consumers could find themselves struggling to make their payments. Pressures would also arise if unemployment were to move up or the housing market to deteriorate.

Canadian households have been increasingly financing consumption through borrowing rather than income. By the end of 2009 it had reached the point that 75¢ of every dollar spent to buy cars was borrowed, up from 39¢ in mid-2008, the survey says.

Canadian banks garnered international praise for their prudence and conservative approach to risk, which helped them make it through the financial crisis almost unscathed, but that well-earned reputation could take a hit if defaults rise significantly.

Among the risks from rising consumer debt, “the banking sector may suffer significant loss of assets rising from the troubled household sector,” the report says.

One reason for the discrepancy between Canada and its peers in the Organization for Economic Co-operation and Development is that nearly all were hit much worse by the crisis and, as a result, consumers in those countries have been paying down debt for several years.

Many economists argue that while household debt in this country is at record levels, low interest rates make it affordable, and given that the Bank of Canada has signalled it will raise rates gradually, consumers have time to prepare themselves.

jgreenwood@nationalpost.com

Posted via web from Toronto Real Estate News, Blog

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About Tariq Sultan
Dear Readers, I am a dedicated Toronto, Ontario based real estate professional who has been successfully meeting and exceeding the needs of his clients for past several years. I am actively involved in the insurance, financing, and mortgage industry. Real estate is not only my career – it is my passion. I strive to continuously provide my clients with exceptional service to ensure they are fully satisfied when it comes to their real estate needs. For any real estate related inquires contact me today, I will be happy to assist you. Best wishes, Tariq Sultan

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