Bank of Canada Governor Mark Carney spoke yesterday about the government’s current issues with household finances.

“The combination of sustained growth of household debt relative to income and a rising interest rate environment could increase the vulnerability of households to an adverse shock”, he said.

Low mortgage rates have enticed Canadian consumers to jump on the housing ban-wagon and take advantage of ‘cheap debt’. The government’s current monetary policy is to keep interest rates low until the middle of next year. This strategy was in part meant to stimulate consumer spending – the domestic market needed to offset the decrease in external demand due to a global recession.

And stimulate consumer spending it did. The Re/Max Housing Market Outlook Report confirmed that national residential housing sales are expected to top 465,000 units by year-end 2009, a 7% increase over last year; while housing values climb 5% to $318,000, up from $303,594 in 2008.

It’s hard to believe that all this activity took place during the worst recession since the Great Depression.

So is the government concerned that Canadians have overextended themselves? Is the housing bubble about to burst?

Personal bankruptcies in Canada rose 41% in the third quarter in comparison to the same period last year. Bankruptcy as a proportion of the population is at its highest level since 1991. Delinquency rates on loans have also increased, with the proportion of mortgages with payments in arrears three months or more up by 50% over the past year.

But despite these alarming numbers, Carney believes that the risks to the current Canadian housing sector are low. He warns consumers and financial institutions to be vigilante as we climb the latter to economic prosperity.

“It is the responsibility of households now to ensure that in the future, when the recovery takes hold and extraordinary measures are unwound, they can still service their debts. Similarly, lenders have responsibilities. Financial institutions should actively monitor risk stemming from households and not take false comfort derived from mortgage insurance and past performance of household credit.”

Only time will tell if the government’s attempt to stimulate consumer spending has gone too far. When interest rates begin their climb, and they will, many consumers will be wondering if they’ve bitten off more debt than they can chew.

Kelly
PR@RateSupermarket.ca

Related posts:

1. Bank of Canada Governor Stresses Caution to Canadian Households
2. Real Estate Market Bouncing Back to Health With the Help of Low Mortgage Rates
3. Will July 2010 Mean Higher Taxes and Higher Mortgage Rates?
4. TD Says Mortgage Demand Will Decrease
5. RateSupermarket.ca’s Expert Mortgage Panel Divided but Consensus Expects Rates to Remain Low in Early 2010

Tags: bank of canada, low mortgage rates, monetary policy, Mortgage insurance