From debtconsolidation-ontario.ca – Even though it is not in absolute terms, but relative to the size of the Canadian economy, the amount of debt which is held by Canadian households has been rising in the last 30 years. When it comes to the modern way of life, debt is considered indispensable. This can be a growing preoccupation when we consider Bank of Canada for many years now. Mainly for negative events, high debts can be more vulnerable. This will apply for the entire economy along with the individuals.
The main thing to be considered is Canada’s financial system’s vulnerability which has been raised from the elevated indebtedness. Here one must analyze the situation of banks managing serious economic recessions along with increasing debts and high unemployment, more info at debtconsolidation-ontario.ca…
Along with this Banks must also think about the vulnerability of the economy towards rising interest rates resulted from high household debts. One must also understand that today economy has become more sensitive towards higher interests rates than before. Along with this one more point to note is even domestic and global interests are on the rise.
Root cause:
Everyone should understand that two trillion dollars is not a small number. Household debt is usually measured by comparing it with the people’s disposable income amount. So, this is around 170% of disposable income in Canada. So, this has resulted in a owe of $1.70 for every Canadian per dollar income per year. But even the economies like Norway, Australia, and even Sweden have more household debt than this relative to disposable income.
So, here are some common factors. In all these countries including Canada household prices have increased steadily in decades. These all have mortgage markets which are well developed, deep and high rates of homeownership. Owning a house has been a part of Canadians culture. It is considered as a way through which they build future since compared to incomes house prices are raising really fast.
Debt a burden:
Here the most important thing is to service the debt in relation to income. So, here interest rate must be lower. This will allow more debt to be carried by a household which he can afford. One must consider the debt service ratio. This is nothing but payments of interest required and principal expressed as a percentage of income.
Here a notable point is mortgages aggregate debt service ratio for Canadian households is very stable from decades. From this one must understand that benefit of the lower interest rates available is taken by Canadians. This is the reason behind a stable debt service ratio.
Risk management:
One can say confidently that over time there is less need for monetary stimulus for the economy. But it is also important that one must consider risks which are facing by the economy in relation to the forecast along with the ones related to household debts.
There is a chance of chocking in terms of growth and this can be high risk if there is a raise in rates. This can even lead to falling short in inflation target as well. There can be inflation pressure if the economy movies too slower. This can also lead to overshoot in terms of the inflation target. Moving slowly can even result in more household debt accumulation which can lead to rising vulnerabilities. One must also avoid risk related to financial stability when moving much slower.