News Canada

Carney sounds note of caution on household debt 0

By David Akin, National Bureau Chief

Mark Carney, Governor of the Bank of Canada holds up a new plastic twenty dollar bill a during a one on one interview with Sun Media's David Akin at the Bank of Canada offices in Ottawa, Oct. 24, 2012. (ANDRE FORGET/QMI AGENCY)

Mark Carney, Governor of the Bank of Canada holds up a new plastic twenty dollar bill a during a one on one interview with Sun Media's David Akin at the Bank of Canada offices in Ottawa, Oct. 24, 2012. (ANDRE FORGET/QMI AGENCY)

OTTAWA - 

Bank of Canada Governor Mark Carney would like you to know he thinks Back in Black is a better AC/DC album than Highway to Hell and that, no, he won’t be a candidate to be the leader of the federal Liberals.

But, more importantly, he’d also like you, the Canadian consumer, to know that he thinks it’s high time many of you stopped maxing the credit card.

“It’s not a universal concern, just to be absolutely clear. We’re not shouting out to every single Canadian that they shouldn’t borrow or that they should never borrow. There are good reasons to borrow,” Carney said in an exclusive interview with Sun News Network in the private governor’s dining room in the bank’s Ottawa headquarters.

“But we are aware that there are some Canadians who have extended their amount of borrowing to what are called vulnerable levels — Canadians who are spending 40% of their income just servicing their debt. And it’s in those situations where you can — it’s a possibility — get yourself in trouble. It’s a note of caution, a note of prudence.”

Carney also wants to make sure that, just as he did when he and his wife took out their first mortgage in Toronto years ago, Canadians feel comfortable paying off their debt over the life of a loan, recognizing that these “emergency levels” of ultra-low rates, as he called it, aren’t going to last forever.

In the interview, to be broadcast on Sun News Network on Thursday at 6 p.m. EDT, Carney spoke about his concerns about Europe, about how NDP Leader Thomas Mulcair misdiagnosed Canada’s economic woes as “Dutch Disease” and touched on how he went from his youth in Fort Smith, N.W.T., to one of the world’s most respected central bankers.

And he touched on his taste for hard rock. As teenager, he used to blast AC/DC’s Hell’s Bells to get pumped for his hockey games.

But the fiscal health of Canadian households is top of mind these days. For every one dollar of disposable income, Canadian households now have about $1.60 worth of debt, an all-time high for that ratio.

Scary as that might sound, the bank's other data suggests the Canadian consumer is doing just fine.

For example, for every five dollars in assets — the value of your home, RRSP and so on — Canadians have only one dollar in debt.

Wage growth in the last year has been picking up, which means Canadians are better able to afford to borrow a bit more.

And, by Carney’s own admission, interest rates, when they do rise again, will likely do so at a sedate pace. Indeed, overnight rates have been stuck at 1% now for two years and many economists think it may just reach 3% in three years.

The financial health of the Canadian household is not just an academic issue. Through the worst of the recession, as business spending dried up, Canadian consumers kept on spending and it was their contribution to our economy that largely prevented things from becoming as bad as they might have. Strong consumer spending also lifted us out of recession quicker than our industrialized peers.

Now, our economy is growing again, but even the Bank of Canada's own forecasts say growth will be a little on the slow side for the next few years. In other words, a confident, happy-to-spend consumer is still going to be important to sustain our recovery.

The bank noted this week that a major “downside” risk on the horizon is weak consumer spending.

So if weaker-than-expected consumer spending could imperil our recovery, why try to scare Canadians away from prudent borrowing with all this talk of scary debt levels?

“Debt endures,” Carney said. “The value of assets can go up and down. Debt … has to be paid every month regardless of what happens to your personal situation or what happens to interest rates.”

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