Low Interest Rates Create an Economic Mirage

Despite louder and louder warnings from some of the country’s top financial experts, Canadian households continue to leverage themselves at an alarming rate. According to Moody’s, the debt burden of the average Canadian household has grown by about 1.5 percent per quarter over the past two years. That translates to an annualized growth rate of 6 percent.

Moody’s argues that historically low interest rates are the primary culprit for the recent increase in household leverage. In a recent report, the respected credit-rating firm expressed skepticism that Canadian households would change their borrowing habits until rates rose significantly.

Many of Canada’s top financial experts believe that such a rise will come too late to prevent an economic catastrophe. Mark Carney, the current head of the Bank of Canada, recently went public with a passionate plea for fiscal restraint.

His concerns may be prescient. During the past decade, the average Canadian household’s debt load increased by 154 percent. By comparison, average household income increased by just 54 percent during the same time frame.

At the moment, elevated levels of household debt may actually be good for Canada’s economy. 70 percent of the country’s aggregate consumer debt is mortgage-related and supports a still-thriving housing market in many major Canadian cities.

As a result, rising home values have spurred breakneck growth in the value of the nation’s home equity loans. The value of outstanding Canadian home equity loans has quadrupled since 2000, and these credit facilities now represent a major source of income for many of the nation’s homeowners. In fact, the average Canadian now derives nearly 10 percent of their total disposable income from home equity lines of credit.

The United States experienced a similar period of easy credit during the mid-2000s. It created tremendous wealth and millions of jobs while it lasted, fueling a construction boom that saw the development of entirely new suburban communities as well as major urban mixed-use projects that remain popular today.

Of course, the euphoria came to an abrupt end in 2007 as the country plunged into a deep recession. The collapse of the U.S. housing market and the subsequent rash of consumer defaults nearly took down the global economy. As it is, the world still has yet to fully recover from the carnage.

Finance Minister Jim Flaherty worries that the same sequence of events may yet derail the Canadian economy. If interest rates rise or banks decide to tighten their lending standards, millions of borrowers across Canada may be thrown into default. The ensuing collapse of the job market would only compound the problem.

For many Canadian households struggling under severe burdens of debt, this grim future has already arrived. In many parts of the country, stagnant wage growth has forced millions of middle-class homeowners to use credit cards and other unsecured credit facilities to purchase basic necessities.

While their home equity lines of credit may be keeping them afloat for now, these folks are just one interest-rate spike or pink slip away from insolvency. An economic downturn would likely force them into bankruptcy. In fact, thousands of Canadians have already given up on servicing their debts and consigned themselves to a long, hard slog through the bankruptcy process.

Unfortunately, many Canadians know little about the debt relief alternative known as debt settlement. Compared to bankruptcy, this process often saves consumers thousands of dollars and years of crippled credit.

Debt settlement programs often conclude in just 12 months and may reduce their participants’ total debt burdens by 40 to 60 percent. Unlike popular but expensive debt consolidation loans, debt settlement involves direct negotiations with creditors and attacks the principal balances on outstanding debts.

Maple Leaf Debt Helpers, one of Canada’s premier debt settlement agencies, offers its services at surprisingly affordable rates. To learn more about the power of debt settlement, call toll-free or fill out the no-obligation online form today.


Speak Your Mind