OTTAWA — Canadians have surpassed Americans for the dubious distinction of being the most indebted and policy-makers are warning they may need to take action.
Fresh data from Statistics Canada found the ratio of debt to disposable income rose to 148.1 per cent in Canada in the third quarter — a close to five point jump — slightly ahead of the U.S. ratio of 147.2 per cent.
The numbers come amid reports the federal government is talking to lenders again about the possible need to clamp down on credit.
Meanwhile, Bank of Canada governor Mark Carney suggested in a speech that he could resort to monetary tightening should the “cheap money” ride continue.
However, federal Finance Minister Jim Flaherty said during a scrum with reporters in Ottawa that he does not see a crisis in household debt levels at this point.
Flaherty said he has been talking to the banks about the situation and is monitoring debt levels, but does not believe that any action is needed at the moment.
TD Bank chief economist Craig Alexander said it was natural that the Finance Department would explore ways to constrain borrowing, but said he also doesn not believe the situation has reached a crisis.
“Debt relative to income has gone up a little faster than it should have, but the problem is not excessive … we don’t have a U.S.-style problem,” he said, referring to the better quality of Canadian debt.
What’s more, he added, credit expansion has slowed of late and many economists believe it will return in line with income growth going forward.
There are a number of measures Finance Minister Jim Flaherty can take, and he has already acted twice in two years. To restrain further borrowing on housing, Ottawa can require that the income test for mortgages be tightened, or it can lower the maximum amortization from 35 years to 30 or even 25, which would have the effect of increasing monthly payments.
In his speech to a business audience in Toronto, Carney warned that although he intends to set interest rates based on inflation, he is also aware that the United States sowed the seeds of the financial meltdown with extended low interest rates.
“While the bar for further changes remains high,” he said, “the bank has the responsibility to draw the appropriate lessons from the experience of others who, in an environment of price stability, reaped financial disaster.”
One reason for the tough talk, say analysts, is that Carney wants to discourage reckless borrowing among consumers with words because his hands seem to be tied on action. Raising rates would further slow an already slow-moving economy.
And there is considerable disagreement about whether Canadian households have a debt problem needing to be addressed.
In a recent analysis, the CIBC made a distinction between what it calls bad debt — the bete noire in the U.S. — and good debt, the situation of many Canadian households who have borrowed to buy homes, not speed boats and luxury cars.
CIBC economist Benjamin Tal notes that Canadians generally put more money down than Americans and don’t refinance their homes to purchase consumer goods.
While the debt-to-income ratio has risen in the latest quarter, Statistics Canada pointed out that the main reason is not because of more borrowing, but due to a 1.5 per cent decline in disposable income.
Still, the Bank of Canada says an economic shock would put many Canadians into financial trouble, unable to make monthly payments or repay loans.
Alexander says Carney is in a “bind ” because the weak economy requires him to keep interest rates at near-floor levels for an extended period in order to lure businesses into spending on investments. But those same low rates may cause households to overextend themselves, which could result in difficulties later on when interest rates rise.
He said the government may need to take steps to rein in consumers if house prices begin rising again.
In a related element of the release Monday, Statistics Canada said national net worth edged up 0.7 per cent to $6.3 trillion in the third quarter.
On a per capita basis, national net worth reached $183,500 in the third quarter, up from $182,800 in the previous quarter. Household net worth grew 2.7 per cent, or $162 billion, to $6.1 trillion, following a 0.5 per cent decline in the second quarter.