The Bank of Canada has just released its twice yearly assessment entitled the Financial System Review. The Globe and Mail reports on it here.
reportonbusiness.com: Consumers, banks to feel pinch [emphasis ours]
Canadian banks have generally remained solid throughout the past 10 months of turmoil, and are able to tap markets to finance their shortfalls. Plus, they have continued lending to Canadian borrowers, albeit with different types of credit instruments that generally cost borrowers more.
We are always watching the Canadian situation and how average Canadians, consumers and Banks are being affected by market conditions. What the report suggests is that we have high debt costs for Canadians, at the same time as the Banks are increasing prices because of market conditions.
This chart is taken from the report. It shows that Canadian consumers, on average, are steadily borrowing more each year, and that it was comfortable because income levels supported that growth. However since 2005, costs of debt repayment are taking a larger proportion of income for the first time in recent memory (since 1989). In simple terms we have had low, and reducing interest rates making the cost of borrowing relatively more affordable, and this has been reflected in the multiple credit card offers we see in the mail for the last few years. The sharp reversal in 2005 suggests even those low rates were no longer enough to cover the debt payments, on average.
The Globe says …
Indeed, Canadian consumers are increasing their household debt levels, and finding that debt more expensive to service, the review showed.
Debt as a proportion of income has climbed steadily for the past 20 years, and now, debt is 131 per cent of income, the review points out.
At the same time, higher mortgage rates have pushed up the cost of carrying a growing debt load. The debt-service ratio was 7.7 per cent at the end of 2007, compared with 7.3 per cent in the middle of last year, just before the credit crisis erupted.
Its always a tough call, and often a very personal one, when times are tough(er) and people want to get better control of their personal debt. At the same time Banks need better cheaper, and more modern alternatives to serve Canadians to meet their individual goals. At CommunityLend we have taken a very Canadian approach and will offer an alternative that we believe will challenge the traditional rules of lending, offerring a viable alternative and set of choices for Canadian borrowers, Investors, and Banks.