FINANCIAL ICEBERG

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Canadian Household - Drowning in Debt

( From​ Statistic Canada, Bloomberg, National Post, CBC, Reuters, Globe and Mail )

Change in Canadian household debt

The Canadian Household Sector Debt Growth Burden

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​The Canadian statistics agency reported that Canadian debt loads were higher in all categories at the end of 2012. Canadian Households' credit market debt, which includes mortgages, consumer credit and loans, rose by C$14.7 billion in the quarter, led by $11-billion in mortgage borrowing, about half the increase seen in the third ( ​​In the previous quarter, mortgage borrowing increased by C$19.1 billion ), but reaching a new record...

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Mortgage borrowing led the demand for credit in the fourth quarter, to reach a total of C$1.1 trillion and and consumer credit debt stood at $477 billion by quarter-end.

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On an annual basis, the level of household debt increased by 5.5% in 2012 as shown by the graph below.

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Canadian Household Debt-to-Income Ratio Rises to Record 165% in Q4 2012



​The ratio of Canadian household debt to disposable income rose to another record last quarter : a Statistics Canada report calculates the average household owed a record $164.97 in market debt for every $100 of disposable, after-tax income they earned in the fourth quarter of 2012 — slightly more than the previous high of $164.7 in the prior three months. ( See graph below )

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Economic Impact



​​Still, the high debt levels suggest that Canadians have little extra room to borrow and spend on big consumer ticket items, or more and bigger real estate, going forward.



​​Also factoring into the cooling story is that despite healthy employment numbers in the past six months, Canadian’s per capita disposable income actually saw a slight dip in real terms over the past six months. Worried about stretched personal finances and high housing prices, Canada's federal government tightened mortgage lending rules four times in the last four years to make it harder for home buyers to take on too much debt in their quest for a home.



The rule changes gradually shorted the maximum mortgage length from 40 years to 25 and put limits on how much people can borrow against their homes, among other measures.



While interest rates are not expected to rise until 2014 - the stiffer lending rules and government warnings about the high debt loads of Canadian households have helped cool the ardor of home buyers, with the hottest markets, including Vancouver and Toronto, feeling a chill.

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​In his previous two policy statements, Carney weakened language about the need to raise the central bank’s 1 percent policy interest rate, partly on evidence a housing boom was slowing and consumer debt burdens are stabilizing.



So we can expect a Canadian consumer with little room to spend who should put a tremendous negative trend for the Canadian economy...​​

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So for every dollar of disposable income they make, Canadians owe almost two-thirds more than that in consumer debt.

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​That is only a few percentage points shy of where U.S. household debt levels reached before the country’s real estate market collapsed, and was a key reason why Finance Minister Jim Flaherty tightened mortgage rules last July.



​​Soaring personal debt has been a top concern of Canadian policymakers as consumers take out mortgages at ultra-low rates to buy homes in a heated real estate market.

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The soaring debt levels, fueled in part by a hot housing market, have led Bank of Canada Governor Mark Carney and Finance Minister Jim Flaherty to warn Canadians repeatedly against getting too deep into debt at a time of ultra-low rates.

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The Bank of Canada in January predicted the trend growth in household credit would moderate and the debt-to-income ratio would stabilize at around current levels.