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Canadian consumers live on the edge because they can, and the good news is that even a small rise in interest rates will be felt so sharply that a larger one may prove to be unnecessary.

The good news and bad news for debt-ridden consumers are wound so tightly they are hard to separate. But let us try.

The bad: Personal debt loads are up - hugely. The good: Because interest rates have been low, the consumer has survived and, for instance, not lost her house. Indeed, not merely survived, but helped keep the economy afloat in tough times. And consumer confidence has returned to normal levels, after having hit a 15-year low during last year's recession.

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About that consumer confidence: Where does it come from? Growth in disposable income is down. Household debt is rising faster than assets. The ratio of house prices to income is at a 20-year high, which suggests, says CIBC World Markets Inc., "stagnating or falling real estate markets over the coming years," especially as interest rates rise. But unemployment didn't rise as much as people feared. Unlike in the United States, the housing market didn't collapse.

In any event, living on the edge is habit-forming. Even in the recession, Canadian consumers took on extra debt. They just couldn't help themselves. Much of that debt is owing, literally, to the lure of a resilient housing market; 70 per cent of the recent growth in Canadians' indebtedness went to mortgage payments, even at historically low interest rates. In Vancouver, families spend an astounding 68 per cent of their disposable income to maintain their houses. More mortgage debt, in an environment in which real estate will stagnate (if CIBC is correct), is unwise. At the very least it will make a lot of people unhappy. With debt as a share of income at a record high, imagine what would happen if interest rates spike. That would be the day of reckoning. Many Canadian households would be pushed over the edge.

As of now, however, "no matter how you look at it, Canadian households are currently in a decent financial position," says National Bank Financial Group. The cost to carry all that debt has actually fallen (as a percentage of disposable income) to 7.6 per cent, from 10.2 per cent in 1990. Consumers are squeezed, but even a small rise in interest rates will cause them to turn down the taps on their spending, preventing the overheating of the housing market that the Bank of Canada has expressed concern about. Still, Canadian consumers have been relentlessly taking on debt, and if the reckoning arrives, many will be unprepared for it.

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