Bank of Canada worries some Canadian households may be over their heads
Most Canadians handle debt well, but a small minority have so much, they might everntually be in trouble. (CBC)
Canadian households will close out 2015 carrying thicker layers of debt after worrisome gains over the past 12 months — extra padding that’s expected to get even fatter in the new year.
But even with the borrowing binges, many experts still believe the finances of most Canadians remain in decent shape.
This assessment comes as the country shows worrisome signs linked to consumer spending. It has a record-high debt-to-income ratio and the central bank has called rising household debt as a growing weak spot in Canada’s entire financial system.
- Bank of Canada says housing, debt threaten financial system
- 20% housing correction would push young homeowners under water
One big bank economist, who has closely studied household debt, said any negative fallout from the debt situation would likely depend on whether Canada sustains an unlikely economic shock.
But trouble could also hinge on how quickly interest rates eventually rise, said CIBC deputy chief economist Benjamin Tal.
Low rates helped build debt
Economic shocks remain difficult to predict and, for at least the next year, Tal doesn’t expect rates to climb at a hazardous speed for those who may have overindulged on debt.
“As a society, there is no question that we are more sensitive to the risk of higher interest rates than in any other time in history,” Tal said. “On its way up, it’s extremely powerful.”
Persistently low interest rates have been a major contributor to rising household debt. Borrowing became even cheaper in 2015 after the Bank of Canada twice dropped its benchmark rate to help cushion the blow of the oil slump.
Households, meanwhile, have dined on debt since the financial crisis and provided spending that has helped the economy recover.
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