Mounting personal debt levels pose a significant threat to Canada's economy and borrowers must recognize that interest rates are only going to rise, Canada's top policy makers warned on Monday.
In an assault on the spendthrift habits of a generation, Bank of Canada Governor Mark Carney, Prime Minister Stephen Harper and Finance Minister Jim Flaherty all warned of the risks that debtors will face once interest rates climb steeply from their still historically low post-recession levels.
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"Household debt in Canada is now at a record high, is now higher than it is in the United States," Carney told a news conference in Toronto.
"At a minimum for us at the bank we have to think about what the implications of this are for how the economy performs if there is an adjustment to housing prices. Because then the wealth is less...and what's the impact of that on consumption in Canada."
Data from Statistics Canada on Monday showed Canadian household debt has risen to a record C$6.1 trillion, or 148 percent of disposable income, although households have recovered the C$552 billion of net worth lost in the downtown.
Canada, like other countries, slashed interest rates to rock-bottom levels as the recession hit, and while the Bank of Canada has nudged rates up since, borrowing costs remain low.
Harper said it is up to individuals to decide how much debt they can carry, but he highlighted new mortgage rules designed to discourage a sharp rise in household debt.
"We continue to warn Canadian households that interest rates are unlikely to go down in the future," he said.
Finance Minister Jim Flaherty said the government would tighten mortgage rules further if needed, but he was not concerned enough now to take immediate action.
"There is no reason for extreme concern now. There is reason for concern, so I watch," he said in Ottawa. "Part of what I have to do is balance the amount of credit we see out there with the job creation that we see in the economy as well."
But BMO Capital Markets said household finances are not nearly as weak as headlines would suggest and there is room for a soft landing for spending.
"Amid the cacophony of warnings, balance sheet repair is in fact quietly underway among Canadian households thanks to a slight rise in savings and firmer equity markets, while debt growth is poised to slow more meaningfully amid the clear cooling in the housing market," Deputy Chief Economist Doug Porter said in a report.
CHEAP MONEY NOT A GROWTH STRATEGY
Carney warned on the risks of what is likely to be a prolonged period of low interest rates in advanced economies and said banks, firms and individuals should be aware that the era of cheap money would inevitably end.
"Low rates today do not necessarily mean low rates tomorrow," Carney said. "Cheap money is not a long-term growth strategy."
In its financial system review last week, the bank said the rapid growth of household debt is the main domestic source of risk, with system-wide disruption more likely if more people become incapable of paying off their debt.
The Bank of Canada raised rates three times this year, but held its benchmark rate steady at 1 percent last week, citing European debt concerns and weak exports as drags on growth.
Carney said any further interest rate hikes in Canada would require careful consideration, but he also distanced Canada's situation from in the United States. The Canadian economic was stronger, so deserved a different monetary policy.