OTTAWA - Canadians are becoming increasingly exposed to a debt crunch but the situation has not reached crisis level and likely won't, according to two of the country's leading banks.
In separate reports Wednesday, TD Bank (TSX:TD) and the Bank of Montreal (TSX:BMO) took different approaches to one of the hottest topics facing households and policy-makers and came to essentially the same conclusion -- the situation is currently manageable.
TD introduced a new index on debt Wednesday showing households in British Columbia are most vulnerable to a shock, such as substantially higher interest rates, falling incomes or a crash in house prices.
B.C. is followed by Alberta and Ontario as the only provinces above 100 on the index. Least vulnerable were Manitoba, the Atlantic provinces and Quebec.
But chief economist Craig Alexander says no region -- including B.C. -- is so vulnerable as to sound the alarm bells, partly because few expect a shock sufficiently serious to push many households into default.
"Despite the picture of growing vulnerability from coast to coast over the past few years, we do not believe that there is a household financial crisis in the making in any region," he said.
BMO deputy chief economist Douglas Porter analyzed Canadians' savings rate at a time when household debt compared to annual disposal income has climbed to a record 148 per cent.
The high debt is a reason for concern, says Porter, but the number ignores the fact that thanks to a "near-miraculous" recovery in stock prices, along with rock-solid house prices, household assets are also at near record levels. Assets to income rose to 420 per cent in the third quarter of 2010 and are still rising, he said.
And at the moment at least, debt service levels are actually falling thanks to super-low interest rates.
"The short answer is I don't think we do ... have a debt crisis, and a lot of the steps we've taken will help avert it," he said.
Both banks cite Finance Minister Jim Flaherty's recent announcement to tighten mortgage eligibility rules as a step in the right direction, adding ballast to a housing market that is the prime reason for Canada's high debt levels.
Porter said hikes to interest rates, which many expect will occur as the economy strengthens in the next few years, will also help Canadians increase their savings rate because of higher returns.
Several banks hiked their three- to five-year mortgage rates by up to one-quarter point this week, a measure that Flaherty said would help further cool the housing market. The Bank of Canada, however, is holding short-term interest rates low for now.
As interest rates rise, Alexander says households across Canada will become more vulnerable to shocks.
But he said interest rates are most likely to rise slowly, giving borrowers time to adjust. At the same time, incomes are projected to grow at between 3.5 and four per cent over the next few years, which would provide a cushion to homeowners with big mortgages.
The major concern is another economic shock which, while unlikely, would put Canadians carrying large debt loads into difficulty.
"The people you worry about are those who bought homes in the last year or so (at elevated levels), who would be saddled with homes worth less than their mortgages if prices dropped," said Alexander.
