The Rising Debt Load of Canadians

An interesting story in the Montreal Gazette suggests that Canadians are among the most reckless spenders in the developed world. With historically low interest rates, consumers have been borrowing at unprecedented levels and now owe a record $1.41 trillion. This puts Canada in the No. 1 spot among OECD nations in terms of consumer debt to financial assets according to study by the Certified General Accountants Association of Canada. That puts Canada ahead of countries such as the Slovak Republic and, tellingly, Greece, and equates to $41,740 for each individual person. This is about 2.5 times the level of debt in 1989.

Although a large portion of this debt stems from residential mortgages, and even though Canadians have been borrowing less to pay for homes recently, they are spending more on just about everything else. The Accountants Association 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 downturn.

During the recent recession, 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. 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.

Not all is doom and gloom however, as many economists argue that while household debt in Canada is at record levels, low interest rates make it affordable. And given that the Bank of Canada has signalled it will raise rates gradually, it appears that consumers will have time to prepare themselves. But do let this serve as a reminder to get those finances in order while interest rates...

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