The president of the Credit Counselling Society has warned that low borrowing costs and rising home prices have lured Canadians into debt traps they may not escape if looming economic threats materialize.
Scott Hannah said that he is seeing an influx of clients as higher financing costs begin to bite and people find it harder to manage. Phone calls were up 5.3% in the first quarter from a year earlier, while online chats increased 40%.
Dubbed “Dr. Debt” after receiving an honorary degree in 2012 from University Canada West for his “distinguished service in the field of credit counselling,” Hannah cautioned that Canadians might be “caught off guard” if housing markets cool significantly or North American Free Trade Agreement talks go sideways.
“We’ve been in a perfect storm for a number of years” where low interest rates encourage borrowing and discourage saving, Hannah told Bloomberg. “People have been lulled into a false sense of security.”
Hannah has been sounding the alarm as rising interest rates and stricter borrowing rules threaten to squeeze households even further. The Bank of Canada is expected to raise its benchmark rate twice more this year, with its next decision set for April 18.
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Canadian household credit totalled a record $2.13 trillion at the end of February, roughly doubling since 2006, according to data from the central bank. Residential mortgages accounted for 72% of that, while the remainder consisted of credit cards, lines of credit, and auto loans.
Households carrying large debt loads tend to feel ahead of the game because home prices keep rising, Hannah said.
“What happens when the economy has a downturn, like in Alberta. We know what happened. We’re still seeing the impact of that,” he explained, adding people in the oil-rich province were “caught off guard, and because of a lack of savings, many people lost their homes, had to sell their assets and start over again.”
Some observers have argued that Canada’s household debt isn’t a problem because asset ratios and home equity levels are also high and the country’s labor market remains strong. A report from the Canadian Banker’s Association last week showed that the national mortgage arrears rate through January was 0.24%, close to the lowest in three decades.
Hannah doesn’t buy it. Low arrears and delinquency rates “don’t tell the whole story,” because a robust housing market is masking financial strains.
“If a person’s had difficulty keeping up with the mortgage payment, it’s been relatively easy just to sell your home,” Hannah stated. “What happens though when you have a tight market and it’s not as easy to sell your home? That’s when you’ll see delinquency rates start to rise.”