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rob carrick

Canada's borrowing boom is fading, and that's bad news for the housing market.

It's all for the best. If we clean up our excessive borrowing habits, then we're not going to be buying as many houses at today's elevated prices in some cities. Common sense, welcome back. You were missed.

Signs the credit boom is in decline are laced throughout a CIBC Economics report that shows overall consumer debt rose by 2.3 per cent in March on a year-over-year basis, the smallest increase since the early 1990s. A slight drop in credit card debt was the big driver of this trend, but there was also a decline in mortgage growth that prompted CIBC's Benjamin Tal to talk plainly about an end to the housing boom.

"The housing market is in its ninth inning," said Mr. Tal, the bank's deputy chief economist and author of the report. "I think that we are basically going to level off, even stagnate. I would not be surprised if housing prices fall in the next year or two."

In his report, Mr. Tal said there is "no debate about the fact that the housing market is overshooting," and he said prices could potentially fall by around 10 per cent in the next year or two.

It's not just the housing market that will have to adjust to a slowdown in new borrowing. Combine the housing sector with consumer and government spending and, according to Mr. Tal, you have roughly 80 per cent of the Canadian economy. Governments are cutting back, which means corporate Canada will need to step up to power growth.

Slower growth in borrowing also means there's less pressure on the Bank of Canada to raise interest rates. The central bank was never going to raise rates simply to restrain borrowers, but high debt levels did add to the rationale for rate hikes. The banking sector will also have to adjust – lending money has been a big profit maker.

The housing market could see the most dramatic change, although right now the shift in sentiment is subtle. CIBC found that mortgage debt was up 6.3 per cent on a year-over-year basis in March, which sounds robust. But it's well below the 7.3-per-cent average for the past two years, and below the rate seen in most of the past decade. Looking ahead, CIBC sees 5-per-cent mortgage growth.

This suggests a gradual softening of the market ahead, and not a violent correction. Still, your approach as a home buyer or owner may need updating to reflect a potential decline in demand for homes. First-time buyers, there's no reason to rush into the market. Build your down payment and wait for an opportunity to buy at a price you can comfortably afford. Baby boomers, it's time to consider your exit plan. Will you live in your current home indefinitely, or is there a case to be made for locking in long-term price gains by selling now?

Mr. Tal said demand for mortgages is declining for the same reasons as other types of debt. It all comes down to "credit fatigue," which he explains as being a result of all the warnings about excessive debt levels from everyone from the Bank of Canada Governor to personal finance columnists like me. "People are listening," he said.

Can this possibly be? Canadians have been berserk for borrowing to the extent that from 2002 to 2008, we accumulated debt at twice the U.S. rate. It's often been said that only rising interest rates would snap us out of our debt daze – hence the speculation that the Bank of Canada would bring borrowers into line by cranking up borrowing costs.

Mr. Tal's convinced we're at a turning point on debt. "I think we've been so focused on how much debt we have that we forgot to look at the trend, and the trend has been clear."

In fact, we've even flirted with a phenomenon called deleveraging, where consumers cut their debt load instead of just slowing the pace at which they're adding new debt. Mr. Tal said that from February to March, consumer credit fell 0.3 per cent on a seasonally adjusted basis.

Deleveraging is tough on the economy, but it's a healthy process in a country where personal debt levels are near record highs in relation to income. So a pat on the back to us all for curbing our lust for borrowing. Now, it's time to start paying back what we owe.

For more personal finance coverage, follow me on Twitter (rcarrick) and Facebook (Rob Carrick).

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