Are Carney’s Debt Warnings Working?

Debt warnings for Canadian households

Despite what the Bank of Canada says about Canadians heeding the warning to shore up debt, the numbers show that’s not true. Canadians debt to income levels are now at 165 per cent – that’s a new all time high. I’ve written about debt to income levels before and how we all need to understand them in our unique situations. But this new record comes after Bank of Canada Governor Mark Carney earlier announced Canadians were listening to his warnings to stay out of debt.  The latest data illustrates that’s not the case.

So what’s really going on? Are Canadians just simply ignoring Carney’s debt warnings or are these debt levels a necessity to maintain the expensive lifestyle demands of today’s housing market? The government has stepped in and tightened mortgage rules and most recently even asked two major Canadian banks to raise their bargain basement mortgage rate offer to avoid people taking on more debt – but it doesn’t appear to be working. Let’s take a look at the possible factors.

Economic Meltdown Reaction

It was four years ago when the financial markets hit bottom on March 9th 2009 and sent the world’s economic situation into a tailspin. At the time credit was freezing up, some stocks had fallen by more than 50 per cent and governments were answering by slashing interest rates to all time lows.The Bank of Canada lowered its overnight lending rate to one per cent to make sure banks could continue to operate and consumers could continue to borrow.

Rates Aren’t Moving

The persistent low interest rates have led to Canadians easily taking on bigger loans and digging themselves into deeper debt. Money is cheap and there is less fear to borrow more. There also seems to be what I like to call “warning fatigue”, as governments keep referring to impending rate hikes, followed by no change at each interest rate announcement.

As a result Canadians are getting used to super cheap borrowing – and this interest rate environment is becoming the norm.

The Bull Run Continues

Canadian home sales have slowed but prices have remained strong. The average price of a home in Canada is $368,895 – but in the major centers like Toronto yiou’ll pay closer to $505,288. In Vancouver that same home will cost you $736,881! New home buyers and those wanting to up-size have no choice but to take on more debt to get into the home they want.

What Should Canadian Consumers Do?

First, stop taking on new debt, and shift your focus to paying off the debt you already have. It sounds obvious, but its likely most homeowners are not doing this. If you have any loans tied to a variable rate, calculate the interest based on two per cent higher than what you already pay, this will protect you and your budget from being affected when rates start to rise.

You Have Been Warned

Carney’s warnings may not be resonating with everyone, but that doesn’t mean they are not real. Once interest rates start to rise many Canadians will find they are unable to afford the debt they have accumulated. In that situation homeowners who have prepared will easily be able to handle the new interest rate environment, but some may have to sell and move and that could result in many loosing a lot of money on the home they bought when rates were super low.

Related Topics

Debt Repayment / Economic News

One thought on “Are Carney’s Debt Warnings Working?

  1. I have to agree with you, I think Carney’s warnings are falling on deaf ears, and Flaherty’s attempts to reign in our debt have seemed misguided at best. The key really is to raise interest rates. We’ve been enjoying these rock-bottom lows for long enough. It’s time to give the savers a break.

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