The Canadian Press

[dropcap]M[/dropcap]ore 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 Laurin Jeffrey for more information – 416-388-1960

Laurin Jeffrey is a Toronto Realtor with Century 21 Regal Realty. He did not
write these articles, he just reproduces them here for people who are
interested in Toronto real estate. He does not work for any builders.
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