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ANALYSIS: Many are worried about the rising debt levels of Canadians given the ultra-low interest rate environment. However, not everyone is worried.
In case you missed it, Bank of Canada Governor Stephen Poloz says it’s not his job to stop people from making “bad choices.”
In other words, borrowers and bankers “ bear the ultimate responsibility for their own decisions,” said Poloz on the weekend. “It is not the role of monetary policy to protect individuals from making bad choices.”
He isn’t worried about the debt to income ratio, which has risen to 165 percent because he says the ratio of debt service to income has stayed the same since 2008. Basically, it’s home prices which have been rising faster in some markets than incomes, and the corresponding impact has been larger first time mortgages being taken out. Therefore, at the end of the day mathematically, the total debt to income ratio rises as a result. But it doesn’t necessarily mean an increase in the vulnerability of the economy or the financial system.
But what about the banking system? A recent report from McKinsey & Co. says the only engine of growth for Canada’s banks is cost cutting. Consumers are tapped out and will likely be borrowing less and even when they do, bank profit margins are being squeezed. Times are changing and while bank profits remain strong now, dividends have been increased and regulatory requirements are being met, competition will be coming from sources never anticipated before and likely unregulated to the same extent as the banks.
In the meantime, while delinquencies are low today, as the economy continues to be challenged and slows with energy producing provinces feeling the pressure for an extended period of time you have to expect delinquencies and credit losses will worsen and that could result in additional cost cutting in the banks. I appreciate it may not be the Bank of Canada’s responsibility to help us save ourselves from ourselves, but when the temptation is so great you sometimes get unintended consequences -- high levels of debt and borrowers getting in over their heads.
I wonder if Stephen Poloz will reduce that temptation just a little as others have done in the past and implement changes to the mortgage rules to help borrowers from making “bad choices.”As the Chief Financial Commentator for CTV News, Pattie Lovett-Reid gives viewers an informed opinion of the Canadian financial climate. Follow her on Twitter @PattieCTV