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Household debt in Canada continues to rise, but it’s not all bad

Maybe one week post-holidays isn’t the best time to peek into your wallet to see how you fare financially, but according to some of Canada’s top economic experts, we are doing OK — sorta.

This assessment comes as the country shows troublesome signs linked to consumer spending. According to the CBC, Canadians are holding a record-high debt-to-income ratio, and the central bank has called out rising household debt as a growing weak spot in Canada’s entire financial system.

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Unsurprisingly, low interest rates have been a major contributor to rising household debt. As borrowing became even cheaper in 2015 (after the Bank of Canada dropped its benchmark rate twice), many Canadian households are at the mercy of potential rising interest rates. It also means the average household had nearly $1.64 in debt for every dollar of disposable income, a record high.

But at least for now, most analysts don’t see a huge spike in interest rates rising, nor are they predicting huge defaults on mortgage or credit card debt. The hope is that as interest rates slowly climb, it will curb consumer spending rather than force Canadians into defaults. So while The Bank of Canada has described the country’s mounting household debt level the most important vulnerability in the financial system — yet delinquency rates on mortgages are near record lows, said Sherry Cooper, chief economist for Dominion Lending Centres, the CBC reported. “If people were stretched, you would expect that there would be an increase in delayed mortgage payments — and we’ve seen none of that,” Cooper said. “We’re all assuming that there’s a huge problem here because debt-to-income ratios for households are at record highs. But the reason they’re at record highs is because interest rates are at record lows. So, people, in fact, can afford to take larger mortgages than historically.”

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For Canadians like Nicole P. of Toronto, it means that while she enjoyed the initial benefits of low interest rates on her mortgage, she is now hovers occasionally at being house-poor as she sees other costs (mainly food, energy, transportation) going up, while her income growth has stalled. Still, she sees her home as forced savings rather than worrisome debt. “I’ve gained equity over the years and like where I live. I never would have saved the amount of money on my own without a forced savings such as a mortgage,” she explains.

Her concern with cost-of-living expenses like food and energy are not unfounded. Across the country, food costs are continuing to rise steadily as our loonie plummets. The University of Guelph’s Food Institute estimates the average Canadian household spent an additional $325 on food in 2015. On top of that, consumers should expect an additional annual increase of about $345 in 2016.

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Still, it’s encouraging to note that analysts are not considering the current economic situation dire. In fact, Finance Minister Bill Morneau announced that other than raising the down payment on homes (costing over $500,000) to 10 percent, up from 5 percent, he has no immediate plans to make additional changes to address growing debt loads, but added he would continue to monitor the issue closely in the new year. Maybe not as uplifting as we’d like, but as Canada’s Finance Minister, I’ll take that to the bank and trust him on that.

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