Canadians more cautious about debt than Americans
Canada’s biggest bank is keeping a close eye on rising household debt levels in this country, but believes that Canadian consumers are still in a more enviable position than their American cousins.
Gord Nixon, president and chief executive officer of Royal Bank of Canada, told an industry conference on Thursday that strength in the residential real-estate market is fuelling personal loan growth in Canada. That suggests that assets underlying household debt are “extremely different” between Canada and the United States.
“There is no question that we watch very carefully personal or household debt,” Nixon told delegates.
“Not only do we have lower levels of household debt, that household debt is underpinned, I think, by a much more stable secure asset level than you have in the United States.”
While, RBC is doing more stress testing to assess the impact of rising interest rates, it continues to expect personal loan growth to continue at “reasonable levels.” Overall, RBC is expecting “high single-digit to low double-digit” growth across most of its retail balances.
Nixon’s comments came on the same day as a new report from the Canadian Association of Accredited Mortgage Professionals suggested that domestic lenders and borrowers are “being extremely prudent” with mortgage loans.
The findings are based on a CAAMP survey of its members in December. Those members issued more than 40,000 loans worth $10 billion, representing one-sixth of total mortgage activity for home purchases.
The study found that 86 per cent of these home buyers chose fixed rate mortgages, with a “significant number” selecting longer terms. Among first-time home buyers, most opted to keep their gross debt service ratio “far below” allowed maximums.
“This new research shows that Canadians are assessing their abilities and vulnerabilities,” said Jim Murphy, president and CEO of CAAMP.
“They are being prudent and the vast majority of Canadian mortgage borrowers are not taking on undue risks. They have factored rising interest rates in to their mortgage decisions.”
Still, some banks are actively counselling their customers about the dangers of taking on too much debt. Bank of Montreal, in particular, has been focusing on consumer education over the past six months.
“Our lenders have been very heavily engaged with the consumer about how much debt is too much,” said Bill Downe, BMO’s president and chief executive officer, at the same industry conference.
Ultra-low interest rates have encouraged Canadians to rack up more debt in recent months. That caused the country’s household debt-to-income ratio to hit a record 145 per cent in September.
That means for every $100 of income, Canadians owe $145 in debt.
Overall, personal sector liabilities increased 1.6 per cent to $1.41 trillion from July to September, according to Statistics Canada.
As a result, Bank of Canada governor Mark Carney issued two stern warnings about soaring consumer debt late last year.
“It is the responsibility of households now to ensure that in the future, when the recovery takes hold and extraordinary measures are unwound, they can service their debts,” he said during a recent speech in Toronto.