Canadians' borrowing has entered ``uncharted territory'' and the risks associated with the level of debt households are carrying is something that ``we all have to take seriously,'' Bank of Canada Governor Mark Carney said Tuesday.
Speaking in a television interview with BNN, Mr. Carney issued his third stern warning on the issue in less than a week, underscoring how concerned the central bank and the federal government have become about the fact that Canadians' debt-to-income ratio is now higher than Americans' for the first time in a dozen years.
``We are in uncharted territory, household debt-to-income is higher than it's ever been,'' Mr. Carney told BNN. ``The level of vulnerable households in Canada is high, and will be substantially higher if interest rates adjust, and that's something that we all have to take seriously.''
Mr. Carney sounded similar alarms on Monday in a speech to the Economic Club of Canada in Toronto, and last Thursday in the central bank's semi-annual assessment of the financial system, in which policy makers identified household debt as the main domestic risk.
Though interest rates aren't likely to rise until about mid-2011, policy makers are worried that too many Canadians won't be able to handle higher payments when they do. Moreover, the longer that rates stay low, the more abruptly they may need to rise to curb inflation when the economy improves.
The ratio of household debt-to-disposable income reached the highest on record in the third quarter, at 148.1 per cent, Statistics Canada said Monday, a 6.7 per cent rise in Canadian household obligations from a year ago. The ratio tops the 147.2-per-cent ratio in the United States and comes as incomes fell 1.5 per cent during the same three-month period.
While the growth of overall debt has started to slow after the central bank raised its benchmark interest rates three times - to a still-low 1 per cent - and the Finance Department tightened rules for some mortgages, officials are increasingly worried that a sudden negative shock, such as a drop in house prices, higher borrowing costs or job losses, would leave some homeowners unable to make their payments and trigger personal and corporate bankruptcies.
``The issue is the sustainability of the situation,'' Mr. Carney said. ``No country can grow debt faster than income persistently. Ultimately it's a shifting in time of consumption.''
Prime Minister Stephen Harper and Finance Minister Jim Flaherty expressed concern about the issue on Monday, with Mr. Flaherty saying the government would do more to tighten mortgage rules if necessary.
Though Mr. Carney said Monday that the central bank is looking at further ways to play a ``supportive role'' in helping government regulators address the problem, he was non-committal in the BNN interview about what steps can or should be taken.
``We're cooperating closely, we're monitoring the situation, and if decisions have to be taken I'm confident that they would be taken at the appropriate time,'' he said. ``These are not decisions for me to take, but the analysis and the perspective is something that we can provide and we have open discussions and the appropriate people, ultimately here, the Minister of Finance, will take those decisions or not, as is appropriate.''
In February, Mr. Jim Flaherty announced measures requiring borrowers to qualify for a five-year fixed-rate mortgage even if they choose a lower-rate variable mortgage. Also, when refinancing, homeowners may now withdraw no more than 90 per cent of the value of the property, down from 95 per cent.
Those measures fell short of some bankers' recommendations for a significant reduction in the maximum amortization period of new mortgages, or a substantial increase in down payments. The Globe and Mail reported Monday that Ottawa, in its pre-budget consultations, is in talks with Bay Street financial executives about possible further steps.
Mr. Carney on Tuesday said he has discussions with the banks but wouldn't say whether he has advised them flatly to curb their lending.
``We have discussions about the sustainability of certain types of activities that the banks are doing, and sometimes we take comfort from those discussions, in other cases I think we surface some concerns that they should have,'' he told BNN.
The central banker also warned against taking comfort in statistics that show, on average, growth in Canadians' assets are vastly outpacing their debts, pointing to other countries whose banks made the ``classic mistake'' of lending based more on borrowers' assets than their liabilities.
``The debt endures, the asset prices go up and down,'' he said. ``People in Ireland, people in Iceland, people in the United States that took out big mortgages on assets that were worth a lot more for a long period of time, found out that the asset's not worth very much but the debt's worth exactly what it was when I took it out.''
The governor also said while Canada's direct exposure to the sovereign-debt crisis in Europe is ``relatively modest,'' there are risks that the situation could intensify, which would affect Canada.
``I wouldn't want to downplay the importance of what's going on in Europe, he said. ``It is important for Canada.''