Consumer Debt

Canadians Spend Like Crazy Americans


Spendthrift Canada? Many Americans would find that hard to believe. Throughout the subprime crisis that rocked the U.S., Canada's economy and banking industry remained rock solid.

Yet in mid-December, the Canadian government released statistics showing that the indebtedness of Canadians surpassed U.S. levels for the first time in 12 years. Household debt as a portion of disposable income was 148 percent in the third quarter, according to government agency Statistics Canada, exceeding the U.S. level of 147 percent.

Canadians, it turns out, have been acquiring big mortgages, too, as the country's recent prosperity drove demand for bigger and better housing. Low interest rates have encouraged Canadian consumers to take on debt, while banks, largely untouched by the financial crisis, have continued to lend. The average size of a mortgage in Canada has gone from C$120,000 in 2004 to $170,000 as of last spring, according to CIBC World Markets, a Canadian investment house.

The rise in household debt puts the government and central bank in a corner. The ordinary response is to cool borrowing off by raising interest rates. Bank of Canada Governor Mark J. Carney has boosted the benchmark rate three times since June to 1 percent.

The problem is that further rate hikes increase the cost of servicing mortgages, which stretch debt-laden households. Higher rates would also attract foreign investors looking for higher-yielding bonds. That would strengthen the loonie further: It's basically at parity with the greenback, which has weakened against most currencies in the last year as the Federal Reserve pursued a loose monetary policy.

A stronger Canadian dollar would make exports pricier—especially to the U.S., Canada's biggest trading partner—and put growth at risk. "The Bank of Canada is in a bit of a box, given where the Fed is and where the Canadian dollar is," says Douglas Porter, deputy chief economist with BMO Capital Markets in Toronto.

Finance Minister James M. Flaherty is trying to cool the market off, too. The government has tightened rules on refinancing and down payments, and made it harder to qualify for government-insured mortgages. "Everybody knows, I think, interest rates will have to go up over time," Flaherty says. "So people have to make sure they can afford their mortgage payments when interest rates rise."

The central bank will have to weigh all these issues before its next interest rate announcement on Jan. 18. While in December it kept rates steady, the pressure to raise them and slow down consumer borrowing is increasing. "The level of vulnerabilities of households remains high," Bank of Canada's Carney said at a press conference on Dec. 13. "Without a significant change in behavior, the proportion of households susceptible to serious financial stress will continue to grow."

The bottom line: Canada's residents have so much household debt that officials are trying to slow their borrowing without strengthening its dollar.

Quinn is a reporter for Bloomberg News in Ottawa.
Argitis is Ottawa bureau chief for Bloomberg News.

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