Blurb: Canadians are borrowing like never before. Have they gone overboard?

Are Canadians carrying too much debt?

By Peter Diekmeyer o

While the housing and stock markets are going great guns, the other side of Canadians' balance sheets, --their household debt,-- is also on the rise. There are numerous reasons for the borrowing explosion and diverging opinions about its implications.

One thing is certain: Canadians are borrowing like never before. Depending on who's numbers you use, aggregate household debt is now at between 110 and 120 percent of disposable income, up from about 70 percent in the mid-1980s. The increase is spread among all categories. Whether it be mortgages, HELOCs or credit cards, Canadians owe record amounts.

Why the surge?
The biggest driver of the debt explosion is probably the fact that borrowing is so darn easy. Interest rates are at near all-time lows, which substantially lowers the cost of debt servicing. That in turn increases consumers' comfort about borrowing more.

Another factor is the relatively strong economy we've seen in recent years. Job creation have been humming along fairly steadily, so Canadians feel relatively confident about their financial positions.

Banks, finance companies and card issuers also get a share of the credit (forgive the pun). During the past 20 years, they have introduced a slew of innovative products, with flexible terms that meet the needs of even the toughest consumers. There's something for everyone in today's financial services market.

Credit cards and HELOCs
A prime example is credit card issuers, whose offerings in the past tended to be limited. These days there are targeted card packages marketed to individuals, big businesses, small businesses, specialty groups, travelers and professions, to name a few of the most prominent categories.

Many cards carry varying fee structures and interest rates on late payments. Features can include anything from air miles based on your purchases, to volume rebates or even check writing services, with the cash drawn against your credit card.

With all these enticements, it's no wonder that according to the Canadian Banker's Association, the number of VISAs and Mastercards in circulation in Canada has shot up from 12.1 million in 1983, to more than 50 million last year. That works out to almost two cards per Canadian. And that doesn't include cards that the association doesn't track such as American Express and Diner's Club Cards, nor those issued by retailers and gas stations.

Canadians aren't just carrying around those cards, they are also using them. During 2003 consumers put $150 billion on their Mastercards and Visas alone, a more than ten-fold in increase during the past two decades.

In fact consumer credit in all categories is on the upswing. According to the Bank of Canada, Canadians owed $253.7 billion in non-mortgage debt, as at June 30, 2004, up 34.2 percent from the $189 billion they owed just four years earlier

Following the Americans?
One consolation for Canadians is that at least things aren't as bad here as they are south of the border. During the past decade or so, the Canadian government has followed a fairly prudent fiscal path, cutting borrowing to the point where for the past several years the state has been running surpluses.

In contrast, the U.S. federal government has increasingly resorted to a "borrow and spend," program to finance its tax cuts and the war in Iraq. Worse, many obligations are left off the books. These include future health and retirement funding commitments which analysts estimate could be as high as $40 trillion, or about four times its annual GDP. This, coupled with massive borrowing by U.S. consumers and businesses has left America is a vulnerable position since much of the country's borrowing has been done overseas.

The good news for Canadians is that the health of government finances is a crucial factor in determining the financial health of its citizens. For example, it interest rates were to rise suddenly and Canadians' individual financial position were to worsen substantially, the Canadian government would have more room to stimulate the economy, than the cash strapped U.S. government would.

Much new debt used to fund house purchases
Canadians other big source of borrowing has been mortgage debt, which has been used to finance house purchases. Canadians mortgage debt, which, according to CIBC World Markets,-- increased 30.6 percent from $428.7 billion in mid-2000 to 559.9 billion by mid 2004, played a big role in fueling the real estate boom that we've seen in recent years.

But that's not all bad news, because unlike money borrowed to finance a holiday or an SUV, mortgage debt not only increases a consumer's liabilities, it also increases their assets. And in many cases, the houses that Canadians bought with the money they borrowed have increased in value. This leaves them in the odd position of having more debt, but at the same time having a higher net worth.

In fact one of the most influential observers of the Canadian financial scene, doesn't see the recent debt spike as much of a problem at all, particularly in light of the low interest rates of recent years.

"We expect the financial situation of the vast majority of Canadian households to remain manageable," said Sheryl Kennedy, deputy governor of the Bank of Canada in a recent speech, though she hints that those low rates won't stay that way forever. "That said, it is important that individual Canadians take into account their own situation to make sure that they are able to manage their debt levels through changing circumstances."


Peter Diekmeyer ( is a Montreal based business writer.



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