Thursday, December 10, 2009

Canada’s Debt-To-Income Ratio 142%

Canadians' Rising Debt Worries Bank
The Bank of Canada used record-low interest rates to help save the economy and put it back on the road to growth. But in doing so it might have created a bigger headache down the road with Canadians carrying too much debt. The central bank acknowledged as much on Thursday in the latest edition of its financial system review, in which it suggested the risk posed by rising household debt levels to financial market stability has increased. Canada’s debt-to-income ratio had climbed to a new high of 142% as of the end of June, in part because consumers are rushing to take advantage of low borrowing costs to buy up assets. Nowhere is this more evident than in the housing market, where the average price of an existing home is up 21% from a year ago while sales volume has climbed 41%. But in taking on new debt, consumers may be failing to account for higher interest rates in the foreseeable future, leaving households “increasingly vulnerable” to any economic shocks, the central bank indicated. “What the Bank of Canada is saying is that there might be too much of a good thing going on,” said Benjamin Tal, an economist at CIBC World Markets. “And I think the issue here is to what extent are extremely low interest rates are blinding Canadians, and giving them a false sense of confidence to buy a bigger house.”

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