Those of us who carry debt — and really who doesn’t — should be bracing ourselves, because interest rates are not going to stay this low forever. We’ve been warned and warned in the past year or so that rates will rise, and it does appear that a rise is in the offing, many think in July.
It was announced this week by Bank of Canada governor Stephen Poloz that Canadians are carrying $2 trillion in household debt. Two trillion! That’s 2,000,000,000,000. That’s not the national debt, which we are not even going to get into. That is what Canadians owe in household debt.
About $1.5 trillion of that debt is mortgages. The rest is other household debt such as credit cards.
There are 36 million Canadians. That means every person in Canada owes $55,555. Take out the babies and those not old enough to get credit and that is a substantial amount of money owed by every Canadian.
Polo says what that means is that the average Canadian owes about $1.70 for every dollar of income he or she earns per year after taxes.
Now math is not my strong suit, but that doesn’t sound good.
I can assure you that a large hunk of that $2,000,000,000,000 is mine. But not all of it. We’re all in this together. We are a society of debtors.
Most of us manage this debt without too much of a problem — at current interest rates. But just think of what your monthly bills would be like if interest rates rise.
The amount of debt is one of the reasons Poloz says the central bank has been taking a cautious approach to raising the prime rate. It currently sits at 1.25 per cent.
Poloz made his remarks on the debt at a Chamber of Commerce meeting in Yellowknife and he began by quoting the bard, “Neither a borrower nor a lender be”.
Agh! If only I’d known that before! Too late.
Poloz says that while Canadian indebtedness is alarming, other countries such as Sweden, Norway and Australia have even more household debt relative to disposable income.
But let’s stick to Canada. In simple terms, Poloz says that the lower the interest rate, the more debt a given household can afford to carry. And the central bank is carefully looking at just how sensitive consumers, and the economy as a whole, are to rising interest rates.
And they will rise. Poloz says the economy “will require higher interest rates over time to meet our inflation goals”.
The bank has already raised rates three times in the past year, although they have been quite small increases. That, Poloz says, is already evident in what banks are charging on new loans, not just mortgages.
Banks are currently offering five-year mortgages in the five per cent per year area, although some rates are better than others. Toronto Dominion, according to the Financial Post, raised its rates to 5.59 per cent last week, their biggest jump since 2011.
“If we raise rates too quickly, we risk choking off growth and falling short of our inflation target. If we move too slowly, we risk a buildup of inflation pressures that would cause an overshoot of our inflation target. At the same time, moving too slowly would mean a further accumulation of household debt and rising vulnerabilities, while moving too quickly could trigger the sort of financial stability risk we are trying to avoid,” Poloz said.
That’s some heavy economic thinking, far beyond me.
I am only thinking, and preparing myself, for opening my mail later this year and seeing numbers that are scary.
Poloz seems confident that Canada’s economy can manage the risks of higher interest rates successfully. The question is, can you? Can I?