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Workers are seen at a condo development in the Liberty Villiage area in Toronto on April 11, 2012.Kevin Van Paassen/The Globe and Mail

Canadians are piling on debt at a slower pace, but with incomes barely growing and the threat from Europe increasing, many of Canada's most vulnerable households may be running out of time to get their finances in shape.

The latest figures from Statistics Canada on household balance sheets, released Friday, show the debt-to-disposable income ratio rose in the first quarter to a record 152 per cent, from 150.6 per cent in the last three months of 2011. Debt growth slowed, but incomes increased at an even slower pace, a familiar trend the Bank of Canada this week said will probably continue.

The report underscores rising concerns over personal debt in the current uncertain environment, amid fears that developments in the fragile euro zone could further shake markets and economies. Interest rates are at emergency-low levels for now, but are expected to begin gradually rising by late this year or early next.

According to an analysis by policy makers at the central bank, the proportion of households deemed most vulnerable to changing financial conditions may be small, at just over 6 per cent, but it is higher than the average of the past decade. And in a semi-annual assessment of the financial system, released Thursday, the bank warned that as the global backdrop threatens to deteriorate, those who are most indebted are "especially vulnerable" to shocks such as job losses or falling home prices even as the overall pace of debt growth slows.

"If the economy here were to pull back, too, all these households that have gotten way deeper into debt, purchasing homes at over-inflated prices, will sooner or later experience real trouble," said Louis Gagnon, a finance professor at the Queen's University School of Business. "From that point, who knows how the situation will unfold, but it won't be good news."

Rising real-estate values have pushed the net worth of Canadians to a record level, contributing to a sense of calm among some observers who argue most borrowers are in far better shape than the debt-to-income numbers suggest. But those rising home values have also fuelled a buying binge, funded through home-equity lines of credit.

While some measures show a relatively balanced real estate market, namely the number of sales compared to number of listings, or the average length of time a home is on the market, others – such as the price-to-rent ratio – show home prices may be overvalued by as much as 10 per cent.

Royal Bank of Canada economist David Onyett-Jeffries has made calculations to determine how seriously a drop in home values could affect Canadians, and says while a 10-per-cent decline would have "a sizable impact on net worth, it wouldn't actually wipe it out."

The likelihood of such a sharp drop appears low for now.

In May, according to figures Friday from the Canadian Real Estate Association, home re-sales across the country fell for the first time in four months, and average prices softened slightly. That suggests the market is in a gradual cooling that analysts say will help Canada avoid a shock that guts household finances and puts the most heavily indebted under water.

Most Canadians will have no problem continuing to service their mortgages and other debts, as long as they don't lose their jobs and interest rates don't jump up overnight, according to Jeffrey Schwartz, executive director of Consolidated Credit Counseling Services of Canada.

"Interest rates, while they are going to rise, they're not going to jump so rapidly that some of the people can't handle a small increase," Mr. Schwartz said.

A spike in unemployment, though, could have a bigger impact, and also seems like the more likely trigger of a shock to the household sector, given the shaky global backdrop and the effect it could soon start having on companies' willingness to retain existing staff, let alone boost hiring.

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