The Cana­dian Press

More Cana­di­ans acknowl­edge they may be reach­ing the upper lim­its on bor­row­ing, even though they believe they are in the safe zone now, a new sur­vey shows.

The annual sur­vey, released by account­ing firm PwC and con­ducted by Leger Mar­ket­ing, found that almost two-thirds of respon­dents believed their cur­rent debt lev­els were about right.

But a sim­i­lar num­ber, 63%, said they wanted to decrease their debt lev­els over the next year – up 4.5% from a year ear­lier – and many indi­cated they were ready to cut back on dis­cre­tionary spend­ing to do it.

“This com­fort is likely due to our high real estate val­ues and low inter­est rates, which make the debt seem minor in rela­tion to the value of the prop­erty and easy to carry month to month,” PwC said in a release.

Cen­tral bank warning

In a recent inter­view, Bank of Canada gov­er­nor Mark Car­ney warned pre­cisely of such a dynamic, where house­holds count on home val­ues and low inter­est rates to ratio­nal­ize their debt loads.

Cit­ing a house­hold debt to income ratio of over 150%, Car­ney noted that Cana­di­ans have never been more in debt. That’s OK as long as home val­ues remain sky high and inter­est rates floor low, he said.

If house prices fall, how­ever, Cana­di­ans could find them­selves in a sit­u­a­tion where their net assets decline as inter­est rates and hence their mort­gage pay­ments rise. Even a return to nor­mal­ized rates would ren­der 10% of house­holds finan­cially vulnerable.

“If a point comes where house prices adjust down­wards, the ques­tion is how is that going to impact con­sump­tion behav­iour,” Car­ney said.

Com­ment: But there is noth­ing to sug­gest that house prices, on the whole, will decrease. Mak­ing sup­po­si­tions about the unlikely ben­e­fits no one. Worry more about ris­ing inter­est rates…

“There is his­tory in other juris­dic­tions where this has a big­ger impact on con­sump­tion on the way down than it does on the way up.”

A his­tor­i­cal analy­sis from econ­o­mist Daniel Leigh of the Inter­na­tional Mon­e­tary Fund found that hous­ing busts and reces­sions tend to be more severe and pro­longed when pre­ceded by a run-up of house­hold debt.

Car­ney said he believed house­hold debt is now the num­ber one domes­tic risk to the econ­omy, say­ing that’s why he has been hec­tor­ing Cana­di­ans to ensure they can afford their debt long-term.

The PwC sur­vey sug­gests more Cana­di­ans are heed­ing the message.

Com­ment: Which is aweome! Seri­ously, peo­ple are pay­ing attenti0n and try­ing to fix things.

Pur­chases delayed

Over­all, 69% said they would be will­ing to delay the pur­chase of a new car, up from 64% last year, the sur­vey found.

Mean­while, 62% would delay buy­ing a new house or upgrad­ing to a big­ger home (up from 56%) and 61% would forgo buy­ing new elec­tron­ics (up from 59%).

“Across the board, we are see­ing a new desire by Cana­di­ans to cut back on major expen­di­tures from our sur­vey a year ago,” said John MacKin­lay, leader of PwC’s national finan­cial ser­vices con­sult­ing and deals practice.

MacKin­lay said the top rea­sons cited for want­ing to reduce debt were fear of not being able to pay off debt (47%), the frag­ile econ­omy (46%) and uncer­tainty in the finan­cial mar­kets (33%).

As a result, PwC con­cluded that Cana­dian banks will likely expe­ri­ence a slow­down in loan growth over the next 12 months, increas­ing com­pe­ti­tion among the lenders.

“Given the pro­longed low inter­est rate envi­ron­ment, banks may not have much lee­way to com­pete for cus­tomers on price so they will have to focus their atten­tion on cus­tomer expe­ri­ence and prod­uct inno­va­tion as means of dif­fer­en­ti­a­tion,” it said.

The sur­vey also found that a big major­ity of respon­dents felt that the respon­si­bil­ity of keep­ing debt lev­els under con­trol isn’t theirs alone and that banks have a role to play.

Com­ment: What? Uh, no, you are solely respon­si­ble for your own bad behav­iour. Please do not try to shift respon­si­bil­ity elsewhere.

In fact, 82% said they believed banks should play a role in deter­min­ing the max­i­mum debt lev­els and then hold them to that limit. That was espe­cially true of those mak­ing $100,000 or more a year (85%) ver­sus those mak­ing less (71%).

Con­sumer lend­ing is a cor­ner­stone of Canada’s banks, account­ing for 27% of their assets and 26% of rev­enue, PwC said, adding that the largest dri­ver of the per­sonal lend­ing mar­ket is real estate lend­ing in the form of mort­gages and home equity lines.

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Con­tact the Jef­frey Team for more infor­ma­tion – 416−388−1960

Lau­rin & Natalie Jef­frey are Toronto Real­tors with Cen­tury 21 Regal Realty.
They did not write these arti­cles, they just repro­duce them here for peo­ple
who are inter­ested in Toronto real estate. They do not work for any builders.
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