What will Carney do if Canadian household debt keeps rising?

Date: May 11th, 2012

By Melanie Epp

Mark Carney believes that record high household debt is the number one threat to the economy. He also believes that if he raises interest rates it would hurt economic recovery, but slow spending.

“In exceptional circumstances,” he says, “If there are issues that threaten financial stability, such as household debt … the bank could use monetary policy for that purpose.” And Carney believes that we are well on our way to these “exceptional circumstances.” As a proportion of disposable income, household debt reached almost 151% by the end of last year. Currently, it stands at 153%.

Very soon, that number is expected to reach 160% – a number similar to that of the US just before the 2008 financial crisis.

“We have never been as indebted as we are today as individuals,” says Carney. “We’ve done analysis which shows that about 10 per cent of Canadians are vulnerable if interest rates returned to more normal levels, which will happen.”

Why is debt growing?

Currently, income growth is currently well below the rate of inflation. Because income growth has slowed, more and more Canadians are borrowing money to buy homes, or are taking loans out on their homes.

Despite what Carney says, though, private sector analysts keep telling Canadians that the Bank of Canada is unlikely to hike rates for at least another year, so many aren’t feeling the pinch. As long as the rates remain low, Canadians feel like they can afford the homes they’ve bought. Sure, record high debt doesn’t seem like an issue as long as home prices keep rising and interest rates remain low, but Carney warns that they’re not going to be this way forever.

As they certainly will, what happens if house prices drop and interest rates rise? Not only will Canadians see the value of their homes plummet, but they’ll also have higher debt to manage – all while income growth remains modest at best. The outcome? Canadians just won’t be able to keep up.

But will home values plummet? It’s hard to imagine, since they’ve been on the rise for so long with no sign of stopping. During an interview on CBC Radio’s The House, Carney told Evan Solomon that there are “issues in some segments” of the housing market, but he didn’t go as far as to say that a housing bubble exists in Canada.

“There are issues particularly in some parts of the country, in the condo market, without questions, where activity has been particularly strong,” he says. “And in some of our major cities, without question, evaluations are extremely firm.”

In particular, unsustainable condo markets in both Toronto and Vancouver have economists worried. The average home price in Vancouver finally declined in March from $823,749 to $730,998. In Toronto, however, the average home price continued to rise from $499,354 in February to $503,998 in March. Across Canada, the average home price is five times that of income, says Carney. The norm is 3.5 times higher.

While Carney says that there are a number of defense mechanisms that can be used to protect against a housing bubble, he suggests that it is ultimately up to Canadians themselves.

“First and foremost, it’s the decisions of the individuals who take out the loans, and Canadians are a smart and prudent people,” he says.

The responsibility, though, doesn’t just lie with Canadians, though; the banks and institutions are also responsible. They need to wise up and stop lending to people who clearly can’t afford the debt. Rates will rise and when the time comes, Canadians need to make sure that they will be able to carry their debt load.

What happens if debt becomes an issue? Without a doubt, some Canadians will be in over their heads when interest rates rise. Others will manage but be forced to reduce spending, a move that will help further slow economic activity.

Meanwhile, private sector analysts tell a very different story about the housing market. They almost unanimously agree that when compared to cost of renting and income, housing prices are too high in Canada. They suggest that a correction is coming, which could result in prices dropping by as much as 10-25%. In over-inflated markets, like those found in Vancouver and Toronto, those corrections may be even higher.

It’s not as if they’re not trying to fix the problem. Jim Flaherty, Minister of Finance, has made three attempts to deflate the housing bubble in the past six years by tightening mortgage-lending rules. Canada Mortgage and Housing Corporation (CMHC) have also done their bit to amend the system, as has the Office of the Superintendent of Financial Institutions (OSFI). In the recent federal budget, Flaherty announced that the government would introduce legislation that will increase governance over CMHC. And it since has.

Just last week, the Globe and Mail reported that Ottawa is “beefing up its scrutiny of CMHC and the more than $500-billion in higher-risk mortgages in its care.” The Conservative government has given OSFI, Canada’s banking regulator, new authority over CMHC.

Initially, the purpose of CMHC was to provide social housing and to insure mortgages for those who were unable to make down payments so that more Canadians could buy homes. Until recently, the federal minister of Human Resources oversaw CMHC. In 2007, CMHC’s mortgage portfolio had a legal limit of $350-billion. Since then, that limit has been increased three times to its current cap of $600-billion – a number that it is fast approaching. If mortgages run over, it’s Canadian taxpayers who’ll have to foot the bill, which is a scary thought since the pool is currently full of high-risk borrowers.

The government is also banning banks from using mortgages that are insured by CMHC as collateral on covered bonds. The practice, it says, goes well beyond CMHC’s mandate. Ottawa says that the new rules will ensure that CMHC’s commercial activities “promote and contribute to the stability of the financial system.” Although the CMHC has become an important financial institution, it has not been subject to the rules of OSFI, says Flaherty. Now it will be.

It’s not just CMHC that’s being scrutinized. Mark Carney has also spoken directly to the banks, asking them to get on board by curbing their lending practices.

Although Carney is constantly warning Canadians about rate hikes, he says that they are a last resort, only to be used if debt threatens the financial stability of the country. Rate hikes will only be used as an option to complement other measures, he says. If debt does continue to rise, though, Carney will intervene. A new agreement, which came into effect last year, gives him the power to act whenever he needs to, if necessary.

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5 Tips for Dealing With Credit Card Debt

Date: May 10th, 2012

There are two types of consumers in the world – those who buy what they can afford, and those who live off credit. Sometimes it’s easy to justify racking up debt, especially when the item you want is deeply discounted. You only have to pay the minimum monthly payment, right? What most people don’t realize is that that deeply discounted item isn’t really deeply discounted when you consider the interest you’ll have pay on it.

Take, for example, the flat screen TV my friend bought last Boxing Day. He was totally maxed out from Christmas shopping, but really wanted to get the TV because the price was right. Without hesitation, he swiped his Future Shop card (at a rate of 29.99%), asked for the 6-month interest free promotion and walked out with a brand new TV. He had 6 months to pay it. No problem.

Sometime in January, his first bill arrived. Since he had received the 6-month interest free promotion, he wasn’t required to make a payment, so he didn’t. The next month passed much the same, as did the few that followed. He considered himself fortunate, as he tried to pay off the other holiday debts he’d amassed instead.

At the end of the 6-month period, the bill arrived with a minimum payment. It was only $10. He paid it. The next month, the $500 TV bill asked for a minimum payment of $18.05. No problem; that was the price of a lunch out, after all. When the bill came the following month it was even lower – $17.89, to be exact. Again, my friend paid the bill and waited for the next month’s one to arrive. Why he didn’t bother to calculate the total cost of the TV, I’ll never know. All he focused on at the time was the savings. Here’s what he should have recognized, though – that TV was going to cost him a total of $1,083! When you think about it, he didn’t really save anything at all.

My friend isn’t alone. Many, many people purchase now with the idea that they’ll pay for it later. And boy do they pay for it later. If you, like my friend, have outstanding credit card debt, here are 5 tips for paying it off quicker.

1.    Don’t avoid your debt, deal with it head on. Knowing what you owe is the first step to managing debt. When debt gets out of control, many of us tend to ignore it. Make a list and prioritize. Always pay the debt with the highest interest rate first.

2.    Hide your cards. Until they’re paid off, put the cards away. Easier said than done? Ask someone you trust to hold on to them.

3.    Think twice when shopping. Do you really need that item? Or do you just want it? There is a difference between needs and wants. Be conscious of yours.

4.    If possible, negotiate a lower rate. If you’re approved for a card with a lower rate, you may be eligible for debt transfer. Sometimes there’s a fee, though, and that fee can outweigh your savings. Always look before you leap.

5.    Devise a payment plan. The best course of action is to come up with a plan and stick to it. If you’re still not convinced that you need to pay more than the minimum payment, use a minimum payment calculator to see what the true cost of your item is.

See how to improve your credit, where to obtain your credit report for free and how your credit score is calculated. For more information on how to obtain a mortgage with bad credit, see our bad credit mortgage financing page. We also assist clients looking to obtain a mortgage after bankruptcy

Bank of Canada Surprises Markets With Hawkish Tone

Date: April 17th, 2012

By Louise Egan and Randall Palmer

* BoC holds rate at 1 pct, same level since Sept 2010
* Says may need to withdraw stimulus
* Sees firmer growth, inflation; faster return to capacity
* C$, bond yields jump on news, markets see earlier hikes

OTTAWA, April 17 (Reuters) – The Bank of Canada said on Tuesday it may need to start raising interest rates, preparing to lead the Group of Seven industrialized nations in lifting borrowing costs even as fears of a flare-up of the European debt crisis have not fully faded.

The central bank held its key overnight rate at 1 percent as anticipated but issued a surprisingly hawkish statement that included explicit language on eventual rate increases for the first time since last July.

“In light of the reduced slack in the economy and firmer underlying inflation, some modest withdrawal of the present considerable monetary policy stimulus may become appropriate, consistent with achieving the 2 percent inflation target over the medium term,” the central bank said in a statement.

The language caught traders off guard, with Canadian dollar and rate futures both jumping following the statement.

The central bank described an economy that is at a turning point where inflationary pressures could become a concern and high household debt is the biggest risk.

It raised its growth and inflation forecasts for this year and said the economy will return to full capacity – the limit at which it can grow without generating excessive inflation – in the first half of 2013 rather than in the third quarter as it predicted in January.

The news prompted three of nine primary dealers surveyed by Reuters on Tuesday to pull forward their forecasts for a rate hike. [C A/POLL]

The median forecast is now for a hike in the first quarter of next year whereas a similar poll last month called for a hike in the third quarter. Five dealers have now pulled forward rate hike forecasts since that poll.

“Certainly it’s a more hawkish statement than the market was anticipating,” said Sal Guatieri, senior economist at BMO Capital Markets.

“So we could see a rate increase this year – at least a couple of taps on the monetary brakes are possible,” he said.


The Bank of Canada has frozen rates since September 2010 after it became the first in the G7 to raise borrowing costs from lows hit during the financial crisis.

It had a false start in mid-2011 when it signaled intentions to increase rates, but it had retreated by September as the European debt crisis exploded.

Its language in Tuesday’s statement was more tentative than in July 2011 when the bank said stimulus “will” be withdrawn.

Canada’s economy has grown steadily since emerging from the 2008-09 recession but policy makers had warned the recovery was at risk from the European debt crisis.

Those external headwinds have abated somewhat, the bank said on Tuesday, although Spain and Italy have come under market pressure this week in a reminder the crisis is not over.

The outlook, which will be discussed in detail in its quarterly Monetary Policy Report on Wednesday, formalizes the more bullish tone adopted by Bank of Canada Governor Mark Carney in the past month.

“In sum, we view this communiqué as an important, and large, step towards further normalizing the overnight rate,” said David Tulk, chief macro strategist at TD Securities.


Such a move would put Canada well ahead of the U.S. Federal Reserve, which has said it expects its key rate to remain near zero until at least late 2014. The European Central Bank likewise has not discussed rate changes, ECB President Mario Draghi said this month.

Tulk now sees the earliest possible date for a hike as September, though he says it is more likely to come later.

On the more hawkish end of the spectrum, Nomura Global Economics analyst Charles St-Arnaud sees a hike as early as the bank’s next rate announcement on June 5.

The Canadian dollar strengthened after the release of the bank statement, rising to a near one-month high at C$0.9865 versus the U.S. dollar, or $1.0137, from C$0.9958 to the U.S. dollar, or $1.0042, before the statement.

Overnight index swaps, which trade based on expectations for the central bank’s key policy rate, showed that after the statement traders priced in higher odds of a rate hike later this year but see little chance of one at the next meeting in June.

The yield rose on the two-year Canadian government bond , and government bond prices underperformed U.S. Treasuries after the news, especially shorter term issues.

The bank said on Tuesday that economic growth and inflation are both likely to have more momentum than it forecast in its January Monetary Policy Report.

It revised its 2012 growth projection to 2.4 percent from 2 percent in January, but cut its 2013 projection to 2.4 percent from 2.8 percent. It sees growth moderating to 2.2 percent in 2014.

That was more upbeat than the International Monetary Fund’s World Economic Outlook, which on Tuesday forecast 2 percent growth this year.

The bank said inflation will soften in the second quarter but then will rise to the bank’s 2 percent target “for the balance of the projection horizon”. In January it saw inflation reaching 2 percent in the third quarter of 2013.

The next BoC meeting is scheduled for June 5th.

Bank of Canada Turns Upbeat But Holds Rates

Date: March 8th, 2012

OTTAWA (Reuters) – The Bank of Canada issued a more upbeat outlook for the Canadian and global economies on Thursday, suggesting that an interest rate hike may be back on its radar screen, albeit not immediately.

The central bank maintained its overnight lending rate target at 1 percent, mirroring decisions by the European Central Bank and the Bank of England and extending its freeze on borrowing costs for an 18th month.

In a statement, it said the Canadian economic outlook was “marginally improved”, uncertainty around the global economy had decreased and the profile for inflation was somewhat firmer than it had foreseen.

It also warned about the dangers of high household debt levels in a sign of increasing worry about Canadians taking on too much mortgage debt at ultra-low rates. Canada’s housing market has been strong, prompting some talk of a housing bubble or a price correction of some sort.

“Canadian household spending is expected to remain high relative to GDP as households add to their debt burden, which remains the biggest domestic risk,” the bank said.

The Canadian dollar firmed to C$0.9925 versus the U.S. dollar, or $1.0076, immediately after the announcement, up from C$0.9955, or $1.0045, going into the statement.

The more hawkish language sent short-term bond yields higher as traders priced in the possibility the central bank will tighten policy sooner than previously thought. The yield on the two-year Canadian government bond, which is especially sensitive to Bank of Canada interest rate expectations, rose to 1.154 percent from 1.139 percent just before the release.

Yields on overnight index swaps showed traders had all but ruled out the prospect of rate cuts this year, whereas they had been pricing in a rate cut for the past few months.

That now looks unlikely, given that the bank says it sees “tentative signs” of stabilization in the European debt crisis, a modest U.S. expansion and high commodity prices.


But analysts still do not expect Canada to raise rates too far ahead of the U.S. Federal Reserve, given that higher Canadian interest rates could drive up the Canadian dollar.

“It shows a little bit more of a hawkish bent. It’s not enough to change their official bias,” said Mark Chandler, head of fixed income and currency strategy at RBC Capital Markets.

The bank said there is “considerable monetary policy stimulus” in Canada, but it made no mention of the need to withdraw that stimulus eventually, as it did in May and July of last year.

Tempering its optimism was the fact that temporary factors will be behind the likelihood of stronger than expected annualized growth for the first quarter. Exports will contribute little to growth despite stronger U.S. demand, because of the persistent strength of the Canadian dollar and competitiveness challenges, it added.

Camilla Sutton, chief currency strategist at Scotia Capital, called the statement “less dovish” and said the Bank of Canada looks set to tighten policy slightly ahead of schedule. “But that’s still a 2013 story. It’s not a 2012 story,” she added.

Analysts surveyed by Reuters last month expected the Bank of Canada to keep rates on hold until the second quarter of 2013.

The bank said the outlook for total inflation and core inflation looked firmer than it had predicted in January.

“After moderating in the second quarter, total inflation is expected, along with core inflation, to be around 2 percent over the forecast horizon, reflecting the combination of modest growth of labor compensation, an economy operating around its potential over time, and well-anchored inflation expectations,” it said.

Bank of Canada Governor Mark Carney has signaled that the inflation target is “flexible”, meaning he could refrain from rate increases even after inflation returns to its 2 percent target and the economy returns to full capacity.

The Bank of Canada meets again on April 17.

Economists: Bet on More Mortgage Rule Changes

Date: February 22nd, 2012

By Vernon Clement Jones

A new poll suggests economists are increasingly convinced the government will move to ratchet down mortgage rules in 2012 – that even as the broker channel ramps up lobbying efforts to block the move.

Some 10 of 14 economists and strategists surveyed for Reuter’s first poll on the Canadian housing sector last week said Ottawa does, indeed, seem poised to tighten mortgage rules within the next 12 months.

Moreover, they believe that intervention is likely to come as early as the busy spring season.

That opinion may be reflected in their projections for home prices this year, with respondents predicting a mere 0.1 percent climb for this year and again in 2013. That’s down from last year’s near-1 per cent price growth.

The poll results may only add to broker concerns that the federal government is planning to reduce the maximum amortization for CMHC-insured mortgages to 25 years instead of the current 30.

Brokers are already concerned that the CMHC has effectively moved to discourage lenders from growing their business-for-self portfolios.

Earlier this month, the Crown corporation warned lenders they’ll face increasingly limited access to bulk insurance for their conventional loans as the CMHC’s $600 billion fund comes within 10 per cent of its government-set ceiling. At the same time, documents from the Office of the Superintendent of Financial Institutions revealed the regulator’s concerns over mortgage lending for self-employeds and lender underwriting standards on those loans.

Economists polled by Reuters are suggesting more formal rule changes are in the works. Industry analysts are betting on that chop in the amortization cap and/or an increase in the cost of mortgage insurance.

CAAMP is now actively lobbying against any such move, with its CEO twice travelling to Ottawa this month to deliver that message to Finance committee members in person.

It has also crafted a new industry report documenting what could well be at stake with further tightening of the country’s mortgage rules — detailing the economic impact of the housing and mortgage industry.

“We want the government to be aware of the economic and job contribution that housing and the real estate industry provide,” said CAAMP CEO Jim Murphy, coming off a second visit to Parliament Hill. ”CAAMP, based on current data and research, sees no need to further tighten or restrict access to residential mortgages at this time.”

The new report by CAAMP Chief Economist Will Dunning is bringing that point home by identifying all the ways that the Canadian housing sector is a significant economic driver.

Housing and mortgage activities, along, “could account for more than 1.35 million direct and indirect jobs about 8 per cent of total Canadian employment,” writes Dunning. “The housing and mortgage industry has been particularly important to job creation these past five years.”

The report estimates that from 2006 to 2011, 18 per cent of all job creation occurred as a direct and indirect result of growth in the housing and mortgage sector.