Bank of Canada warns on record household debt levels
January 26, 2018
The governor of the Bank of Canada, Stephen Poloz, is concerned about soaring home prices and the increasingly high amount of household debt Canadians are accumulating. He says it keeps him awake at night.
Debt can be your friend right up until the point it causes you financial harm. The current mentality is to over consume and that is made possible by easy access to low-cost borrowing.
According to Statistics Canada, the main culprit for increased household debt is due to escalating mortgage debt. That poses a financial danger because the Canadian Real Estate Association predicted home prices will decline during 2018.
Two things are needed for a specific mortgage amount to be reasonable. The value of your house and your ability to earn the income needed to make mortgage payments.
If the value of a highly mortgaged house declines, it is unlikely that the mortgage lender will be interested in renewing that mortgage at the current level. If you and others are forced to sell your house due to financial difficulty, that will put additional pressure on what appears to be a declining housing market.
As for your earning power, the Royal Bank reported household debt numbers increased because our disposable income growth has failed to keep pace with our borrowing habits.
Another concern is the level of interest rates. The Bank of Canada raised interest rates during 2017 and higher rates translated to fewer people able to service their mortgage debt.
Many have suggested strategies to reduce debt but what is needed is the motivation to reduce debt, and that will only materialize when enough Canadians see this as a real danger.
Canadians need to consider a stop to borrowing and a start to reducing debt.