Ignoring warning, racking up debt

Canadians fond of cheap borrowing

Canadians are continuing to heap on non-mortgage debt, despite warnings from top officials about the perils of cheap borrowing, according to a consumer credit study released Thursday.

Equifax Canada’s quarterly consumer credit trends report found consumer indebtedness, excluding mortgage debt, grew 3.4 per cent year-over-year in the first quarter.

New loans opened during the quarter were up by about one per cent.

The biggest increase in outstanding balances was for auto finance loans and leases, which grew by 10 per cent from the first quarter of 2011.

“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.”

Since the recession, the Bank of Canada has kept interest rates low to stimulate the economy. The central bank’s current overnight lending rate — which affects prime rates at banks — is one per cent.

However, the plan to get consumers spending comes with a consequence that could spell economic trouble in times ahead.

With household debt at an all-time high above 150 per cent of income, the Bank of Canada has declared it the No. 1 domestic risk to the economy.

In a recent interview, bank governor Mark Carney lamented the comfort level of Canadians with high debt, attributing it to the illusion of affordability at a time of sky-high home values and floor-low interest rates.

If house prices fall, however, Canadians could find themselves in a situation where their net assets decline as interest rates and hence their mortgage payments rise. Even a return to normalized rates would render 10 per cent of households financially vulnerable.

In signs that consumers may be improving their overall credit situations, credit-card debt decreased by 2.1 per cent year-over-year, continuing a downward trend for the past six quarters, while consumer bankruptcies have decreased by 3.1 per cent since the same period last year.

 

The Canadian Press

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