Customers shop for the holidays at Fairview Mall in Toronto, Sunday, December 12, 2010.Adrien Veczan for The Globe and
Ottawa is talking to the banks about putting new measures to curb the rise in consumer debt into the next federal budget.
Deputy finance minister Michael Horgan has broached the topic in prebudget consultations with executives from Bay Street firms, sources say.
Several bankers have told him that they would support further federal moves to cool the mortgage market, including cutting the maximum term of mortgages or increasing the minimum down payment.
Gordon Nixon, chief executive officer of the Royal Bank of Canada, the country's largest bank, said he's not hitting the panic button yet over concerns that some consumers may not be able to repay their loans.
But "we are clearly at the limit," he said in an interview. "You do not want significant growth in consumer debt."
Low interest rates have enticed Canadians to borrow more than they could afford to otherwise, and many are now stretched. The average debt per household, including mortgage and credit card debt, hit a high this year of $96,100, as the debt-to-income ratio climbed to a record 146 per cent. Job losses or higher interest rates down the line could push consumers past their limit, resulting in bankruptcies and damage to the economy.
"We're not in dangerous territory right now," Mr. Nixon said. "But taking steps to ensure that we don't have a problem is a prudent thing to do."
Bankers shared similar fears with Ottawa in the fall of 2009. In February, 2010, Finance Minister Jim Flaherty announced measures designed to make it harder for mortgage borrowers to get in over their head.
The rules, which took effect on April 19, require borrowers to qualify for a five-year fixed-rate mortgage even if they choose a lower-rate variable mortgage. Previously, home buyers had only to qualify for the higher of either a three-year fixed-rate or variable-rate mortgage.
When refinancing, homeowners may now withdraw only 90 per cent of the value of the property, down from 95 per cent. And for purchase of homes that the owner is not going to occupy, the minimum down payment rose to 20 per cent from 5 per cent for insured mortgages, a move designed to rein in speculative buying.
But those measures fell short of what some bankers wanted, namely a significant reduction in the maximum allowable amortization period of new mortgages or a substantial broad increase in down payments.
Mr. Horgan, who has been Mr. Flaherty's No. 2 since late 2009, is talking to lenders about whether more needs to be done.
"We constantly monitor the housing market and personal debt levels, as we all clearly don't want households overextended," said Annette Robertson, a spokeswoman for the Finance Minister. "That means talking to banks and ensuring they have appropriate and prudent lending practices. We have taken actions to ensure banks lend money responsibly and will again if needed."
The Bank of Canada has kept borrowing rates low for longer than many economists had expected, offering a steady stream of fuel to the housing market and consumer spending. But in the process, Canadian debt levels have risen to troubling heights.
And for most Canadians, this is the time of year credit card debt increases due to spending on Christmas gifts and holiday travel. The typical shopper plans to spend $624 on gifts this year, about $100 less than last year, an RBC survey found.
The average Canadian has a debt of $25,000, excluding mortgage loans, according to credit agency TransUnion.
Fairfax Financial CEO Prem Watsa is among the influential voices pointing to the impact of soaring debt on the broader economy. Not only are Canadians overleveraged, primarily with mortgage debt, low interest rates have prompted speculative buying that is artificially inflating housing prices, he said.
According to the latest statistics from the Bank of Canada, the banks were holding $497-billion in residential mortgage loans to consumers in September, up from $468-billion in January.
The central bank noted last week that the amount of both mortgages and credit card loans that were in arrears in the second quarter of 2010 was well above the level before the financial crisis.
PricewaterhouseCoopers LLP is releasing a survey on Monday of households with an annual income above $100,000 that found that 64 per cent of respondents plan to cut their debt load in the next 12 months, even though most said they think that they could responsibly take on more debt.
"Canadians, while they believe they've got continued good access to credit through their banking relationships, actually plan to lower their debt over the coming year," said John MacKinlay of PricewaterhouseCoopers. "In particular, they're considering deferring large-ticket items."
The risk is that if consumers act relatively quickly to reduce their debt load, that could cause fresh headaches in some parts of the economy, illustrating the conundrum that policy makers face as they balance the economic benefits of consumer spending with the risks.
For instance, the survey found that 64 per cent of people would be willing to delay buying a new car to pay down their debts, which could mean new pain for an already battered automotive sector.
When the financial crisis erupted, Ottawa put pressure on the banks to keep up the flow of credit to support the economy. The government put temporary emergency programs in place that made it easier for the banks to lend, especially in the form of mortgages.