In a recent speech to the Economic Club of Canada, Bank of Canada Governor, Mark Carney, fired a cautionary shot across the bows of Canadians who have accumulated record levels of household debt in the current historically low interest environment. Our current and continuing low interest rates, he pointed out, are an “extraordinary measure” taken in response to the financial crises that have rocked global economies over the past several years.
While Canada went into the financial crisis in much better shape than other industrialized countries, and therefore emerged from it more quickly and more unscathed than any other G7 nation, household debt levels soared as interest rates dropped. The worry now, according to Mr. Carney, is that banks, homeowners and consumers have begun to take ultra-low interest rates as the new norm.
“Cheap money is not a long-term growth strategy,” he warned his audience. “Monetary policy will continue to be set to achieve the inflation target. Our institutions should not be lulled into a false sense of security by current low rates.”
To homeowners, and first time buyers entering the housing market while interest rates are well below historic norm, he cautioned that, they “need to be prudent in their borrowing, recognising that over the life of a mortgage, interest rates will often be much higher.”
“Now is not the time for complacency,” he warned Canadians.
“Household debt in Canada surpassed the U.S. for the first time in 12 years during the third quarter, as Statistics Canada announced Monday that the Canadian debt-to-income ratio hit a record 148.1%,” reports the National Post. Mr. Carney’s speech was no doubt made with these potentially grave numbers in mind.
All is not dire in the Statscan report, however, as the National Post notes. “(A)ccompanying the heavier debt loads was an increase in net worth. Household net worth was up 2.7% in the third quarter to $178,600. That was the largest increase seen in the past year,” the Post points out, “and a figure that was bolstered by a strong stock market rally during the quarter.” However, as they note, “(i)t is still slightly below the record $179,000 seen in the second quarter of 2008.”
Yet, in Mr. Carney’s speech, which followed the release of Statistic Canada’s report, the warning about the worrying levels of debt – irrespective of the moderate increase of net worth – could not be clearer. “(M)arket participants should resist complacency and constantly reassess risks,” he warned. “Low rates today do not necessarily mean low rates tomorrow. Risk reversals when they happen can be fierce: the greater the complacency, the more brutal the reckoning.”
The message that the shot across their bow was meant to convey, is that Canadians should get their spending and household debt under control, and ensure they can afford their home mortgages when rates rise.
