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Condos in Toronto

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Toronto Real Estate

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Bank pooh-poohs debt bomb talk

Royal CEO says the quality of underpinning assets will likely head off a U.S.-style mortgage blow-up

Rita Trichur & Tony Wong – Toronto Star

Canadians are doing a decent job of managing their debts even though they are borrowing more than ever before, says the chief executive of this country’s largest bank.

Royal Bank of Canada’s Gord Nixon told an industry conference Thursday that while Canada’s housing market boom is fuelling personal loan growth, the quality of assets underlying consumer debt here is “extremely different” than in the United States.

“There is no question that we watch very carefully personal or household debt,” Nixon told delegates. “Not only do we have lower levels of household debt, that household debt is underpinned, I think, by a much more stable secure asset level than you have in the United States.”

Although RBC is conducting stress tests to assess the impact of rising interest rates, it still expects personal loan growth to continue at “reasonable levels.” That should translate into “high single-digit to low double-digit” growth across most of its retail business.

Nixon’s remarks coincided with a new report from the Canadian Association of Accredited Mortgage Professionals that suggested while Canadians face rising mortgage payments this year, fears of a debt bomb are overblown.

Most are being prudent by taking out fixed-rate mortgages, and a rise in incomes will likely offset higher payments down the road, housing analyst Will Dunning said in the report.

“The degree of risk from rising mortgage rates appears to be small and manageable,” observed Dunning. “The vast majority of Canadian mortgagers are not taking on undue risks.”

Another encouraging sign is that most first-time home buyers are opting to keep their gross debt service ratio “far below” allowed maximums.

Those trends suggest most consumers have factored rising interest rates into their mortgage decisions, the report said.

Still, some banks are actively counselling their customers against getting too deep in hock.

“Our lenders have been very heavily engaged with the consumer about how much debt is too much,” said Bank of Montreal’s chief executive officer Bill Downe.

Canada’s household debt-to-income ratio hit a record 145.1% in the third quarter of 2009. That means for every $100 of income, Canadians owe $145 in debt. The comparable U.S. figure is 151.7% but that ratio has fallen over the past year.

Low interest rates have encouraged Canadians to rack up more debt in recent months. Currently, variable rate mortgages can be had for about 2.25% or less, compared with 5% at the peak of the market in 2007.

That’s prompted Bank of Canada governor Mark Carney to warn that an eventual rise in rates could leave many vulnerable.

Finance Minister Jim Flaherty, meanwhile, has mused about increasing minimum down payments and decreasing the maximum amortization on mortgages.

Toronto-Dominion Bank’s chief executive officer Ed Clark suggested that public policy has a role to play in curbing consumer excesses.

“I wouldn’t use interest rates. I would use more specific measures …”

Even as policymakers wring their hands about rising debt, a number of recent reports suggest that a wave of future defaults is highly unlikely.

“The reality is that in the past, interest rates have played only a minor role in driving mortgage default rates,” said CIBC World Markets economist Benjamin Tal. “The level of vulnerability in the mortgage market is not as high as suggested by the Bank of Canada.”

Tal says in a recent report that mortgage arrears are influenced mostly by unemployment and not by interest rates.

The recession has certainly meant more mortgage arrears; up to 0.44% verses 0.30% from 2004 to 2008, according to CAAMP.

And even the Bank of Canada seems to be toning down its rhetoric. A speech Monday by economic advisor David Wolf stressed the real estate market was not in a bubble.

“It is premature to talk about a bubble in Canadian housing markets,” said Wolf. “We see the housing market as requiring vigilance, not alarm.”

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Contact Laurin Jeffrey for more information  –  416-388-1960

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3 Responses to Bank pooh-poohs debt bomb talk

  1. Jenell Magginson says:

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  3. Hello there. Thank you. I check it regularly to get the newest stuff. Extremely educational article.

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