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(Olga Utlyakova)
(Olga Utlyakova)

'Excessive' personal debt a concern Add to ...

The Bank of Canada isn't the only one worried about ballooning debt levels.

Personal debts have become "excessive" and are a growing cause for concern, Toronto-Dominion Bank warned Wednesday.

Economic fundamentals suggest an appropriate personal debt-to-income ratio in the coming five years should be between 138 and 140 per cent, it said. The current ratio is 146 per cent and TD believes it will grow even further, to 151 per cent. Expressed another way, TD estimates that Canadians will soon owe $1.51 for every dollar of disposable income.

The risk of all that debt is that more consumers could run into trouble if they meet a sudden financial shock. Those with low incomes, who don't have many assets they can liquidate in an emergency, are most vulnerable.

"A U.S.-style crisis is not in the making, but Canadian personal debt growth must slow relative to its past rapid pace of increase," the bank said.

With U.S. debt declining, though, Canadian household debt levels aren't much different from those of the United States, it added. Debt levels in the United States peaked at close to 160 per cent.

The report comes as the Bank of Canada, too, is warning on debt levels. The central bank slashed its growth forecast Wednesday and said a slowdown in housing markets and rising debt will put the brakes on household spending.

Debt levels - which include mortgages, secured lines of credit, credit cards and other types of consumer loans - have been rising for several reasons, among them a growing consumer culture, low interest rates and a two-decade-long advance in home ownership rates.

A "self-perpetuating cycle occurred," said TD economists Craig Alexander, Derek Burleton and Diana Petramala. Demand for houses swelled, prices rose and, together with rising equity markets before the downturn, net wealth increased. This feeling of wealth, in turn, encouraged households to boost consumption and investments.

More women in the work force is another factor, the economists said. Households with two income earners tend to carry more debt, TD said, because they believe it's unlikely they will lose both incomes. "This can be a false sense of security if both incomes are needed to service debt," the economists said.

All measures of debt point to a growing vulnerability, but not an outright crisis, they said.

Indebtedness has become "excessive relative to what economic models would predict as appropriate," the report said. "Growth in personal debt must slow relative to income growth over the coming years or else the risks of a future deleveraging will increase."

If the central bank is really concerned about debt loads, it should raise interest rates to slow borrowing, said Sheryl King, head of Canadian economics at Merrill Lynch, who believes household debt levels are reaching "uncomfortable" levels.

"Stop giving away debt for free, and maybe people will stop accumulating it so quickly."

Personal debt has nearly tripled since the mid-1980s, as individual net worth has also grown, with much of the acceleration occurring since 2007.

The TD report recommended further research to explore what's been driving debt levels, and what policy measures should be taken to cool them.

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