Tuesday, December 14, 2010

Bonus Tuesday Post: More Carney Warnings on Debt

Bank of Canada Governor Mark Carney is speaking out again today on debt.

In an interview today with BNN, Carney issued yet another stern warning.

Clearly our central bank is highly concerned about the fact that Canadians' debt-to-income ratio is now higher than Americans'. This is the first time in 12 years we have put ourselves in this position.

Carney commented that Canadians’ borrowing has entered "uncharted territory" and the risks associated with the level of debt households are carrying is something that "we all have to take seriously."

(please... keep the gagging down out there, blogoshpere)

Said Carney:

  • "We are in uncharted territory, household debt-to-income is higher than it’s ever been. The level of vulnerable households in Canada is high, and will be substantially higher if interest rates adjust, and that’s something that we all have to take seriously."

Once again the main concern is while interest rates aren't likely to rise until about mid-2011, Carney is worried that too many Canadians won't be able to handle higher payments when they do rise.

Of particular interest is Carney's assertion that the longer that rates stay low, the more abruptly they may need to rise to curb inflation when the economy improves.

More Carney:

  • "The issue is the sustainability of the situation. "No country can grow debt faster than income persistently. Ultimately it’s a shifting in time of consumption."

Perhaps the most intriguing element of Carney's warnings the last couple of days has been his caution that the Bulls should not take comfort in statistics that show, on average, growth in Canadians’ assets are vastly outpacing their debts.

Carney pointed to other countries whose banks made the "classic mistake" of lending based more on borrowers’ assets than their liabilities.

  • "The debt endures, the asset prices go up and down. People in Ireland, people in Iceland, people in the United States that took out big mortgages on assets that were worth a lot more for a long period of time, found out that the asset’s not worth very much but the debt’s worth exactly what it was when I took it out."

Ahh, yes... there can be a lot more 'HELL' in the acronym HELOC than people appreciate.

Carney is telling us Real Estate doesn't always go up. He sees a downturn coming. As in the United States, a slight downturn is what started toppling the dominoes.

Ultimately this will be our undoing as well.

"Sell now or lose out on that equity forever."

To watch the BNN interview:

Click here for Part One

Click here for Part Two

Click here for Part Three


Email: village_whisperer@live.ca

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