More Canadians acknowledge they may be reaching the upper limits on borrowing, even though they believe they are in the safe zone now, a new survey shows.
The annual survey, released by accounting firm PwC and conducted by Leger Marketing, found that almost two-thirds of respondents believed their current debt levels were about right.
But a similar number, 63 per cent, said they wanted to decrease their debt levels over the next year — up 4.5 per cent from a year earlier — and many indicated they were ready to cut back on discretionary spending to do it.
“This comfort is likely due to our high real estate values and low interest rates, which make the debt seem minor in relation to the value of the property and easy to carry month to month,” PwC said in a release.
In a recent interview, Bank of Canada governor Mark Carney warned precisely of such a dynamic, where households count on home values and low interest rates to rationalize their debt loads.
Citing a household debt to income ratio of over 150 per cent, Mr. Carney noted that Canadians have never been more in debt. That's OK as long as home values remain sky high and interest rates floor low, he said.
If house prices fall, however, Canadians could find themselves in a situation where their net assets decline as interest rates and hence their mortgage payments rise. Even a return to normalized rates would render 10 per cent of households financially vulnerable.
“If a point comes where house prices adjust downwards, the question is how is that going to impact consumption behaviour,” Mr. Carney said.
“There is history in other jurisdictions where this has a bigger impact on consumption on the way down than it does on the way up.”
A historical analysis from economist Daniel Leigh of the International Monetary Fund found that housing busts and recessions tend to be more severe and prolonged when preceded by a run-up of household debt.
Mr. Carney said he believed household debt is now the number one domestic risk to the economy, saying that's why he has been hectoring Canadians to ensure they can afford their debt long-term.
The PcW survey suggests more Canadians are heeding the message.
Overall, 69 per cent said they would be willing to delay the purchase of a new car, up from 64 per cent last year, the survey found.
Meanwhile, 62 per cent would delay buying a new house or upgrading to a bigger home (up from 56 per cent) and 61 per cent would forego buying new electronics (up from 59 per cent).
“Across the board, we are seeing a new desire by Canadians to cut back on major expenditures from our survey a year ago,” said John MacKinlay, leader of PwC's national financial services consulting and deals practice.
Mr. MacKinlay said the top reasons cited for wanting to reduce debt were fear of not being able to pay off debt (47 per cent), the fragile economy (46 per cent) and uncertainty in the financial markets (33 per cent).
As a result, PwC concluded that Canadian banks will likely experience a slowdown in loan growth over the next 12 months, increasing competition among the lenders.
“Given the prolonged low interest rate environment, banks may not have much leeway to compete for customers on price so they will have to focus their attention on customer experience and product innovation as means of differentiation,” it said.
The survey also found that a big majority of respondents felt that the responsibility of keeping debt levels under control isn't theirs alone and that banks have a role to play.
In fact, 82 per cent said they believed banks should play a role in determining the maximum debt levels and then hold them to that limit. That was especially true of those making $100,000 or more a year (85 per cent) versus those making less (71 per cent).
Consumer lending is a cornerstone of Canada's banks, accounting for 27 per cent of their assets and 26 per cent of revenue, PwC said, adding that the largest driver of the personal lending market is real estate lending in the form of mortgages and home equity lines.
The survey of 1,200 Canadians was conducted in December and is considered accurate within plus or minus 2.8 percentage points 19 times out of 20.