Canadians appear to have gotten the message Mark Carney was sending when the Bank of Canada governor went public last year with his concerns about rising levels of household debt.
In the months since his remarks - which were augmented by changes to lending rules by Ottawa - growth in consumer borrowing has noticeably slowed, according to Royal Bank of Canada and credit-counselling agencies. A clearer picture will be available when the banks report their second-quarter earnings next month.
Meanwhile, it appears that tapped-out consumers are preparing for inevitable higher interest rates, and tighter lending rules have deterred some would-be borrowers from taking on more than they can afford. Also, the central banks' latest forecast indicates policy makers see growth in households' spending evolving more in line with growth in incomes.
Mr. Carney ratcheted up his warnings last year, arguing too many indebted Canadians would be in big trouble if they were to lose their jobs or suddenly incur a large, unexpected expense. At the time, the average household debt level including mortgages had reached a record 146 per cent of personal disposable income. Initial signs of a pullback are being attributed to two factors: consumers scaling back their appetite for debt, particularly now as rising energy costs cut into their budgets, and changes the federal government made to longer-term mortgages and secured lines of credit.
"You have seen a material slowing of growth of consumer lending in Canada, a business that for four or five years was growing in double digits," David McKay, head of Canadian banking for RBC, said in an interview. "Lending growth has slowed as Canadians themselves looked and said, 'Okay, I've used about as much equity as I wanted to and I don't want to over-lever.'"
In January, Finance Minister Jim Flaherty announced the government would no longer back 35-year mortgages, reducing the maximum amortization to 30 years for loans insured by Canada Mortgage and Housing Corporation. Ottawa also moved to lower the amount Canadians borrow against their home, reducing the amount homeowners can leverage in a mortgage refinancing to 85 per cent of the property's value, from 90 per cent. Government backing of home-equity lines of credit, through CMHC, was also eliminated.
Those measures, which are now taking hold in the market, plus a healthy dose of "moral suasion" from Mr. Carney, appear to have had the desired impact, Mr. McKay said.
Much of the rise in consumer borrowing that the banks have seen in recent years was due to the emergence of home-equity lines of credit that allow consumers to easily finance a renovation or a vacation by drawing upon the equity in their house. However, as those tools grew ever more popular, the government became concerned about their impact on the economy, along with rising credit-card debt.
At a speech in Windsor, Ont., in late September, Mr. Carney signaled to consumers that the central bank was increasingly concerned many families were living beyond their means and were unprepared for the inevitable rise in interest rates.
"This cannot continue," Mr. Carney said. "While asset prices can rise or fall, debt endures."
Even without government backing, home-equity lines of credit remain popular among credit-worthy customers, Mr. McKay said. However, RBC has seen slower growth for credit lines and a slight drop in appetite for new mortgages this year.
Even though Canada's economic downturn was shorter and less brutal than in many countries, rising debt could be a problem in a future downturn, particularly if housing prices are hit.
"We just have to be cognizant that another downturn could be longer, with some house price correction," Mr. McKay said.
The International Monetary Fund this month increased its 2011 growth forecast for Canada, while pointing to housing and consumer debt as potential tripwires for the recovery.
Mr. Carney's latest economic forecast, released April 13, indicated policy makers see spending growth moving more in line with growth in disposable incomes over the next two years or so, "leaving the savings rate relatively stable at a low level and the ratio of household debt to income near historic highs."
Jeffrey Schwartz, executive director of Consolidated Credit Counseling Services of Canada Inc., said more Canadians are coming to agencies such as his for advice, a trend he predicted will increase as households face the prospect of higher interest rates while grappling with rising gasoline and food costs.
"Basically, over the last eight to 10 months we've seen a lot more people in here looking for advice, trying to get on a budget that they can manage, and also service their debt." Mr. Schwartz said.
Retail sales data from Statistics Canada suggest many Canadians had started to spend more cautiously late last year, although the most recent reading from February showed a gain.