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Canada Economy in Doldrums

Household debt is a top risk to the Canadian economy.Household debt is a top risk to the Canadian economy.

The Bank of Canada wants Canadians to know that the economy could collapse. The BoC has noted two factors that could literally kill the Canadian economy: a veritable housing market bubble and too much debt. Both factors could crush the Canadian economy in 2017.

The big question is: how many will heed the BoC’s warning? Canada’s household debt ratio has never been higher. A severe economic event like a shock or a market crash could launch a domino effect of negative consequences. A market crash, like the one seen in 2007-2008, could lead to a sudden increase in the unemployment rate, warns the BoC, LombardiLetter reported.

In that grim scenario, many Canadian households facing huge debt burdens would find it tougher to pay their debts. Many would start defaulting on loans, mortgages, and credit cards and subsequently lose their properties. The banks would foreclose many family homes, exactly as happened in the United States in the wake of the sub-prime crisis.

The Bank of Montreal had already made it clear. The level of Canadian household debt relative to income reached a record high in the third quarter of 2016. Borrowing in Canada has grown faster than income.

The ratio of household debt to adjusted disposable income rose to almost 167% in the third quarter. It was 166.4% in the second quarter.

The BoC may have sounded the alarm, but this is hardly the first time that analysts have identified household debt as a top risk to the Canadian economy. The federal government has often intervened to try to limit mortgage default risk.  In 2016, some municipalities took steps to reign in the real estate market bubble by imposing special taxes for foreign buyers.

BMO noted that the upward trend in household debt is not new, but it’s getting worse and nothing suggests that it will stop. Not until the market crashes, that is.

That explains why the BoC has developed such concern about a potential market collapse in Canada. It has put the Canadian economy on notice. The number of dire warnings about heavy household debt and real estate dreams from the bank have increased sharply.

House prices have gained some 15% since the summer alone. The prices were supposed to have cooled after BoC Governor Stephen Poloz noted that housing price gains had no correlation to actual fundamentals.

In other words, the BoC hinted that the housing market has been operating in a kind of fantasy land beyond any market principle. Poloz’s warnings came as Statistics Canada published data showing that the household debt-to-income ratio crashed its way through another record in the third quarter.

 

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