Household credit is rising at the fastest rate seen in any post-war recession. Australia raises rates, bubbles back in spotlight

Eric Lam, Financial Post

Household credit is “defying gravity,” growing at the fastest pace of any recession since the Second World War when adjusted for inflation, a new report from CIBC World Markets shows.

A booming real estate market that has sent outstanding mortgages surging 7.8% year-over-year in August is the primary driver, accounting for almost 70% of the 7% increase in overall household credit, said Benjamin Tal, senior economist at CIBC World Markets.

That is in stark contrast to the 1991 and 2001 slumps, when mortgage growth ground to a halt on an inflation-adjusted basis, the report notes.

“During a recession, usually mortgage markets go down, but this time it hasn’t and the reason is affordability, driven by low interest rates,” Mr. Tal said. “The Bank of Canada cut interest rates to stimulate the economy, and it’s working.”

In the first six months of 2009, total debt rose by $44-billion but interest payments on debt actually fell by $3-billion.

Debt interest payments as a share of disposable income at 7.7% are also at their lowest point since 2006. In the 1991 recession, this ratio was more than 10%.

Craig Alexander, deputy chief economist with TD Economics, said a major part of the real estate boom comes from pent-up demand as nervous Canadians started to realize this spring that the recession was not as bad as once feared.

“People were [also] responding to mortgage rates that are too good to last, so it’s stealing some of the 2010 sales,” he said. About half of that trend has already been absorbed, he said.

“Canada is in a unique situation where we are in the best position to provide credit and Canadians are in the best position to accept that credit,” Mr. Tal said. “It’s almost a crime not to take advantage of it. But we have to do it in a responsible way.”

Neither Mr. Tal nor Mr. Alexander see the current pace of growth in real estate continuing because the Bank of Canada will step in and raise interest rates if the real estate market runs out of control.

“Real estate markets that are too strong cause problems,” Mr. Alexander said. He expects home price growth in the mid-single digits while home sales will grow at a moderate pace so the Bank of Canada will not need to get involved.

Rising prices are creating a seller’s market and supply will also eventually catch up to demand, moderating growth, he said.

Still, Canadians must be prepared for when interest rates inevitably rise, the economists said.

“They are emergency rates, they won’t be here forever. It can be a recipe for problems down the road so the hope is consumers realize that,” Mr. Tal said.

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