Who’s afraid of debt? Toronto Dominion Bank apparently:
The warning from TD emerged as the Bank of Canada’s latest quarterly update indicated growth in consumer spending growth would slow as household balance sheets are “increasingly” stretched. Mark Carney, the bank governor, reiterated he was “concerned” about household debt, which on a debt-to-income ratio stands at a record 146%.
TD warned that ratio is, in their estimation, headed higher — to over 150% — as interest rates remain abnormally low, with the Bank of Canada policy rate not expected to reach 3.5% until 2013.
The present level of household debt is “excessive,” the report said. Economic fundamentals justify a debt-to-income ratio close to 140%.
Phew! Economic fundamentals justify a debt to income ratio around 140%! That’s good news, only 6 percent less than the current record levels! How hard could that be reach?
Mr. Alexander said debt growth has averaged roughly 8% to 10% a year in the past decade. Meanwhile, disposable income is expected to climb at a modest annual 4% pace, according to TD calculations. This means average debt growth would have to slow significantly to 2% a year — which would be “unprecedented” in a non-recessionary period — for the debt-to-income ratio to reach a more reasonable range of between 138% to 140%.
Oh, I see. Well where is all that debt growth coming from?
..a large part of the debt increase has been due to rising home ownership rates and rising house prices. Homeownership rates are nearing 70%, up from about 66% in 2001.
Hmm.. You mean like in the USA?
“We are not facing a U.S.-style problem,” the chief economist added, “but personal finances have gotten stretched at this point. The big risk is actually if debt picks up from here.”
Even if debt growth slowed from the average 8% to 10% range to a 5% annual pace, this would result in the debt-to-income ratio climbing to 151% by 2013, or roughly 11 to 13 percentage points above a “sustainable” level.
So is anyone doing anything about this problem?
Mr. Carney has repeatedly warned about the perils of households taking on too much debt, saying such behaviour could put Canadians in peril once interest rates begin to climb to so-called more normal levels. The TD report indicated as many as 10% to 11% of Canadian households might become “financially vulnerable” should the benchmark rate climb to 3.5%.
Well as long as they’re being warned everything should work out fine.
