Nothing to worry about if house prices rise indefinitely.
http://www.theglobeandmail.com/repo...punch-drunk-on-household-debt/article2315580/
Boomers 'Punch Drunk' on household debt
tavia grant
Posted on Thursday, January 26, 2012 9:00AM EST
People over the age of 45 and already-heavy borrowers are driving virtually all of the increase in Canada's household debt load, a new study has found.
The report, to be released Thursday, crunched numbers at the micro-level to shed light on what's going on behind the national averages, which soared to record highs last year.
It finds that the most heavily-indebted are responsible for all of the rise in debt since 2007, and that those who should be saving for retirement and building assets are moving fastest into a financial hole.
“While a crisis does not appear imminent, there are cracks emerging in the financial foundation of Canadians that are likely to impair spending growth ahead,†says the report, titled “Punch Drunkâ€, by CIBC economists Avery Shenfeld and Benjamin Tal.
Ballooning household debt has made headlines in recent months, and Bank of Canada Governor Mark Carney has warned it is the No. 1 domestic risk to Canada's economy.
Low interest rates have driven recent debt growth. But that's not all – household income growth was weak last year, just as inflation heated up. As a result, real disposable income fell 0.1 per cent in the first three quarters of 2011, the bank said – another reasons why people got squeezed.
High household indebtedness doesn't necessarily mean Canada is facing a U.S.-style crash -- as CIBC points out, Denmark's levels are “light years†ahead of Canada, and so are those of the Netherlands and Switzerland.
But they do bear watching closely, because they suggest more Canadians are financially vulnerable to sudden changes such a job loss, drop in housing prices or increase in interest rates.
Other economists, too, have flagged that it is older Canadians who are piling on debt. In October, a TD report found the 65-plus age group are racking up debt at three times the average pace.
The findings have implications for retirement trends, and consumer spending. “Canadians nearing retirement who should be in their prime savings years are, instead, getting themselves deeper into debt,†the CIBC report said.
“We are already seeing an uptrend in bankruptcies for those 50 and over, but the more material impact will be that this group’s ability to spend could be severely squeezed upon retirement.â€
As for heavily indebted borrowers, the study finds virtually all of the rise in debt in the past four years comes from people with a high-debt-gross income ratio. “The indebted have piled on still more debt,†it said.
As a result, the share of heavy borrowers has soared -- to 34 per cent of all indebted households today, compared with 26 per cent in 2007.
Among provinces, British Columbia and Alberta have the highest share of heavy borrowers.
The bank doesn't anticipate any sharp run-up in household bankruptcies. But it does suggest consumers won't contribute much to economic growth this year, just as governments are cutting back. Businesses, therefore, will have to do the heavy lifting in propelling growth.
