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Household Debt Leaves Canadians 'Maxed Out' With No Plan For Repayment: Survey

Nearly half of consumers are a few hundred dollars away from insolvency.
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If you're wondering why the Bank of Canada has all but shelved plans to keep raising interest rates, look no further than the financial state of Canadian households.

Nearly half of them 48 per cent say they would not be able to pay their bills if they came up just $200 short in any given month, according to the latest quarterly survey from business advisory firm MNP Ltd.

Watch: How high house prices are actually harming Canada's job market. Story continues below.

That's up from 46 per cent in the previous quarter. The percentage has been roughly in this range for the two years the survey has been running.

But with interest rates rising over the past year-and-a-half, Canadians' confidence in their ability to carry their debt is declining. MNP's index tracking households' debt confidence fell four points in the latest quarterly survey, "signalling growing concern and deteriorating financial stability for many," MNP said.

"Canadians appear to be maxed out with no real plan for paying back what they have borrowed. This raises many alarming questions about how and if consumer debt will be repaid, particularly if conditions deteriorate or interest rates rise," MNP president Grant Bazian said in a statement.

This isn't news for the Bank of Canada, whose governor, Stephen Poloz, has cited stressed consumers as a key reason the bank is holding off on rate hikes for the time being.

Between the summer of 2017 and the fall of 2018, the bank raised its key lending rate five times, to 1.75 per cent from 0.5 per cent. While that is still a very low lending rate by historical standards, it's the highest Canada has seen since the financial crisis a decade ago.

These hikes, coupled with tougher new mortgage regulations, finally put a stopper in Canadian households' debt binge almost. Household borrowing has fallen to its lowest level in more than three decades, but is still growing, and hit another record high at the end of 2018.

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Consumers' sharply negative response to what should have been a mild increase in rates is throwing a big question mark over the long-running notion that Canada is a beacon of responsible lending.

"Credit has become inextricably woven into Canadian household budgets. A whole industry has grown up around making that happen, from payday lenders to credit card companies, to buy-now-pay-later retail offers. Paying down debt or saving for the future is seen as more of a luxury than a necessity," Bazian said.

A recent report from CIBC suggests that the pressure to get into the housing market is trumping responsible borrowing among Canadian households. The mortgage stress test put in place last year, which applies only to federally-regulated lenders, is pushing borrowers into the unregulated alternative mortgage market, CIBC economists wrote.

Some experts have said over the years that it's practically impossible to estimate the risk in these unregulated mortgage markets in Canada, because we simply don't have the information to track them.

Paying down debt or saving for the future is seen as more of a luxury than a necessity.Grant Bazian, MNP Ltd.

Relief may be on the way for consumers, in the form of lower mortgage rates. In a note last month, economists at the Bank of Montreal noted that the interest paid on a five-year Government of Canada bond has dropped steeply since late last year.

Popular fixed-rate mortgages tend to follow the five-year bond, so mortgage rates may be coming down again in Canada soon, BMO suggested.

Some of the more bearish economic forecasters expect the Bank of Canada to reverse course this year and start cutting interest rates.

"If growth misses the (Bank of Canada's) forecasts in the second half of the year as we expect, then officials are likely to follow through with (a) cut (to) interest rates before long," Stephen Brown, senior Canada economist at Capital Economics, wrote in a client note last week.

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