Spendthrift Canadians face 'debt time bomb' CIBC says household debt up 20% in 4 years, slow growth of incomes partly to blame
Gary Norris The Canadian Press
Friday, January 21, 2005
TORONTO - Canadian households have put themselves seven per cent deeper into debt than a year ago and are acutely vulnerable to any economic turmoil, a CIBC World Markets report warned yesterday.
An apocalyptic credit-market collapse is unlikely but "a complacent approach toward the rapid pace at which Canadians borrow is similarly misleading and dangerous," according to the study by economist Benjamin Tal.
Debt is increasing faster than the economy's fundamentals can support, he wrote in a study titled Are We Sitting on a Debt Time Bomb?
"I'm talking about people who borrow to support a lifestyle they cannot otherwise afford," Mr. Tal said in an interview.
"The sensitivity of households to higher interest rates and to other economic shocks suggests that the next recession will be more severe because of that."
His report says Canadian households owe 20-per-cent more than at the start of the decade while average disposable incomes have risen at an annual rate of less than two per cent after inflation, amid an "almost chronic inability of the Canadian economy to generate high-paying jobs."
Despite these alarming trends, the credit market "is still behaving in an almost utopian fashion," thanks to years of low interest rates.
"Many borrowers have been sheltered by cheap credit for half a decade -- a long enough period to build a false sense of confidence in their ability to finance their growing liabilities," Mr. Tal warns.
And although no recession, interest-rate spike or other wrenching events are expected, "lest we become too content, it's worth reminding ourselves that economic shocks are inherently unpredictable."
Mr. Tal's admonition came a day after another CIBC World Markets study warned that a sharp rise in the Canadian dollar could provoke a "major recession," and two days after TD Bank economists said the financial well-being of Canadians has not improved since the early 1990s.
The TD report observed that while the value of assets such as homes -- unlike incomes -- has outpaced weightier debt loads, this probably doesn't make people feel much better.
"For instance," the TD study said, "a paper gain in the value of one's home might not seem as tangible as hard debt -- amounting to an unprecedented 120 per cent of after-tax incomes -- that must be financed, even if it's at low interest rates."
Canadian banks increased their consumer lending by 9.6 per cent in their financial year ended Oct. 31, according to a Merrill Lynch tally. At the same time the six biggest banks reduced provisions for bad loans, which helped to bulk up their collective profits last year to a record $13.3 billion.
However, this doesn't concern Mr. Tal.
"Most banks, when it comes to reserves, have very good risk-management systems," he said.
"The issue is not supply ... The issue is, you know, people have to be responsible. Even if the bank is willing to lend to you, you have to ask yourself: do you really need it, and can you afford paying it back if you lose your job ... or if interest rates go up (two or three percentage) points? We are all big boys and girls."
>From a public policy perspective, he added, the solution is to raise incomes
through higher productivity, propelled by such measures as better education,
improved infrastructure and greater economic efficiency. "The lack of income
is at the heart of the problem."