Why a rate hike won’t be a blow to most

MICHAEL BABAD

Globe and Mail Blog
Posted on Tuesday, February 1, 2011 6:32AM EST
Bank of Canada Governor Mark Carney and other policy makers have no doubt been scaring the pants off consumers who have loaded up on debt like there's no tomorrow. Well, there is a tomorrow, and that was their aim.

But while the risk of overweight debt levels is a "significant" one to the economy, the effects of the inevitable rise in interest rates should not be oeverestimated, National Bank Financial says in a new reportMr. Carney has warned repeatedly that household debt levels are too high, and Finance Minister Jim Flaherty recently tightened up the mortgage market again. This came as the ratio of household debt reached a whopping 148 per cent of disposable income, a level higher than in the United States.

"It's not that Canadians are throwing money out the window," said Yanick Desnoyers, assistant chief economist at National Bank Financial.
"Rather they are buying more houses, taking the homeownership rate to a record 70 per cent. Since very few homebuyers pay cash, the resulting indebtedness is hardly surprising."
About 40 per cent of homeowners have no mortgage, compared to 31 per cent in the United States, Mr. Desnoyers found.
And given that some 30 per cent of Canadians rent, about 58 per cent of households pay no mortgage interest. Coupled with that is the fact that the net equity of owners in their homes is "very high," more than 60 per cent, compared to 39 per cent in the United States.

Also on the plus side, Mr. Desnoyers said, is the mix of mortgage products.
Two out of three mortgaged homes have pay a fixed rate, leaving just 14 per cent with a variable-rate mortgage.
"In other words, the great majority of Canadians are not exposed to a monthly-payment shock from a rate rise," he said.
"Though a larger proportion of households have home-equity lines of credit, all at variable rates, it remains that a rise in interest rates will not be an overnight blow to the bulk of households."
For a while, it looked like consumers were heeding the warnings, and the increase in credit was easing. But new numbers yesterday showed household credit climbing 0.6 per cent in November, from a month earlier, and 0.8 per cent in December.

"That was a stronger than a year ago, and lifted the annual trend to 6.8 per cent, but a bit down from the average growth of 7.5 per cent in 2009/10," said Douglas Porter, deputy chief economist at BMO Nesbitt Burns. "Adjusted for [consumer price index] inflation, credit growth is running at 4.4 per cent, about 2 percentage points below the average of the past two years."
There are two ways to look at the numbers, according to Mr. Porter, sort of a glass-half-full, glass-half-empty kind of thing.
Even with the rise late last year, growth in household credit is at its slowest in seven to eight years. Of course, even with the softening last year, credit growth remains strong in real terms, and it's still climbing at a faster pace than income.
"It needs to slow more before the [Bank of Canada] will relax," Mr. Porter said.