Consumers get message on debt, rein it in

Canadian consumers, it appears, got the memo after all.

A new study by Benjamin Tal, the deputy chief economist at CIBC World Markets, shows borrowers are "getting the message that they need to cut back on their debt levels."

Bank of Canada Governor Mark Carney and others have been warning for months that families are gorging on debt, bringing the debt-to-disposable income level to a record. Now, though, according to Mr. Tal, consumers are pulling back.

"The Bank of Canada continues to warn Canadians about the risk of rapidly rising household debt, but the reality is that slowly, behind the scenes, credit growth is already softening," he said in his report today.

"Inflation-adjusted growth in household credit in the third quarter of 2010 was the slowest in more than nine years, while the 0.27-per-cent increase in credit during October of last year (the latest available data point) was the softest monthly reading in more than 15 years."

Among Mr. Tal's findings:

• Mortgages outstanding are still rising at almost 7 per cent, year over year, but a monthly trend indicates the rate seen during the recession.
• Mortgage arrears appear to have peaked, though they're stabilizing at twice the pace in the recession. That's still below the rates of past slumps.
• Lines of credit are growing at 0.3 per cent a month, the slowest since 2007.
• Debt is still rising at a pace that eclipses income, but not assets.
• Debt interest payments now represent 7.2 per cent of disposable income, the lowest since mid-2006.
• Consumer bankruptcies are "in a clear downward trend."
• There's a similar trend in delinquencies on consumer loans.

"Consumer spending in the past two years was by far the most leveraged in recent history but this trend is starting to normalize," Mr. Tal said.

"Growth in consumer credit is already declerating (mainly in sources that are used largely for consumption such as credit cards and lines of credit). And as the ratio of growth in borrowing to spending returns to normal in 2011, look for growth in consumer expenditures to take an additional haircut."

The credit card market has "softened notably" in the last year.