Rent Real EstateBuddy, Can You Spare a Dime? Canadian Borrowing Jumps 7.7 Per Cent
Household credit in Canada is rising faster than you can swipe a credit card, prompting concern that some consumers are getting in over their heads. For now, however, the number of personal bankruptcies is down, indicating that borrowers are able to cope with their current payments.
A report by the Canadian Imperial Bank of Commerce (CIBC) (www.cibcwm.com) says total household credit is currently expanding by 7.7 per cent on a year-over-year basis, the fastest pace of growth in 11 years.
The mortgage market continues to expand as well, with mortgage debt rising by 7.6 per cent during the year ending in October 2002. During that same period, consumer debt rose by more than eight per cent.
"The current environment of very low interest rates, healthy consumer confidence and the relatively slow pace of income growth is a sure recipe for increased borrowing," says Benjamin Tal, a senior economist with CIBC World Markets. "We believe that the pace of household credit growth is sustainable given our prediction of relatively stable interest rates. However, by the second half of this year, we should see some moderation in the pace of growth of household credit -- largely due to some softening in the mortgage market."
This week, Canada Mortgage and Housing Corp. predicted the residential mortgage market will exceed $517 billion in 2003, an increase of six to eight per cent. The federal housing agency is predicting continued economic growth and job creation in Canada, which will combine with "positive demographic factors" and low mortgage rates to sustain demand in new and resale housing markets.
However, some experts worry that consumers may be borrowing too much. Frank Kisluk, president of Debtor Consulting Services in Toronto, told newspapers that even a small increase in interest rates could bring a quick end to consumer spending, and that he worries about borrowers" ability to pay off their debts.
The CIBC report says personal income is rising by only five per cent per year, which means the debt-to-income ratio is rising too. However, debt service payments are currently at only 7.8 per cent of disposable income, down from 8.3 per cent a year ago, the report says.
Personal bankruptcies fell by 1.5 per cent during the first 11 months of last year, with the province of Quebec showing an 11 per cent drop in bankruptcies. Ontario, the country"s largest province, saw a slight rise in bankruptcies.
"While we expect the number of personal bankruptcies to rise in 2003 due to softer labour market activity, the magnitude of the increase is likely to be limited, given our expectation that interest rates will remain relatively stable," says the report.
The number of mortgages in arrears is also falling, despite the record number of home sales during the last few years.
One of the most popular credit options for homeowners is the personal line of credit, which grew by 26 per cent during the year. Home equity loans are also up by 25 per cent. Many homeowners use these types of loans to pay for major renovations to their houses. Studies have shown that a strong home renovation market follows a period of good resale housing activity, and Canada"s existing homes market has been clipping along at a record pace for the last few years.
"The second half of the year should see a notable softening in overall housing market activity, with 2004 being a relatively neutral year for this market," says the report. "This assessment is behind our forecast that growth in the overall mortgage market portfolio will stabilize at around seven per cent (year to year) in the coming months and will slow to six per cent in the second half of the year."
But while the housing market may slow down, so far there"s no sign that consumers are worried about covering their growing expenses each month.