Household debt poses critical risks for Canada's booming economy

by Ephraim Vecina on 05 Nov 2018

A powerful cocktail of relatively slow housing markets and potential changes to tax regimes (which could pull down investment volume) is placing the Canadian economy at grave risk of household debt reduction, according to a new study.

Morgan Stanley’s Household Deleveraging Risk Indicator also reported that falling home prices, weaker credit growth, and rising interest rates are other risk factors that feed into household debt.

This is an especially troubling situation in light of just how much of the population is already teetering on the edge of bankruptcy.

The late October edition of MNP LTD’s Consumer Debt Index indicated that 40% of Canadians are concerned about their existing debt, while 43% are regretting the debt load that they have taken on in their lives.

Fully 1/3 of Canadians are also anxious about rising rates, which they fear might finally push them towards insolvency.

Read more: Rising rate environment worries Canadians

The Morgan Stanley report pointed at Sweden, Norway, and Australia as other developed countries facing similar dangers.

“The increasingly proactive use of macroprudential tools and greater inflation-target flexibility in some countries will lead to more gradual rate-hiking cycles, with lower neutral rates in the medium term,” the multinational investment bank warned, as quoted by Bloomberg.

“These economies now face a crucial juncture as housing markets weaken, forcing a reappraisal of leverage and wealth, and global financial conditions tighten, increasing the consumption drag from debt service and rising savings.”

 

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