Canadians being more cautious with debt, says banker

Rita Trichur - Business Reporter
The slowdown in Canada’s housing market suggests consumers are being more “prudent” with credit after racking up a record amount of household debt earlier this year, says one of this country’s top bankers.
Gerry McCaughey, chief executive officer of the Canadian Imperial Bank of Commerce, said he is confident that Canadians remain capable of keeping up with their payments – despite much hand-wringing in recent months about skyrocketing household debt.
At an investor conference sponsored by his bank in Montreal, McCaughey suggested that the slowdown in mortgage lending is positive even though it means weaker loan growth for banks.
“I think the consumer probably is taking a pause and acting in a prudent fashion, and that’s what’s driving this slowdown in the housing market,” McCaughey said.
“And I think that is a good thing because, as I say, some day (interest) rates will rise back to more normal levels. It would be a good idea to have the level of total debt at a more manageable state.”’
Earlier this month, Statistics Canada reported household debt hit $1.481 trillion during the second quarter of 2010, up from $1.385 trillion during the same period last year.
The Canadian Payroll Association, meanwhile, warned that 59 per cent of Canadians believe they would be in a financial jam if their paycheques were cut or delayed by a week.
“Unless there is a large change in terms of the economy going back into recession, I think the Canadian consumer is more than capable of managing these current debt levels,” McCaughey said.
“But I do think it is time, and we are already seeing this, for some pause in terms of the build up in borrowing. And I think that’s prudent because rates won’t always be this low.”
The Bank of Canada has hiked its trendsetting interest rate three times since June. That overnight rate, now sitting at 1 per cent, influences consumer borrowing costs on a slew of floating-rate loans such as variable-rate mortgages.
Réjean Robitaille, chief executive officer of Laurentian Bank of Canada, said the new harmonized sales tax that took effect in Ontario and British Columbia this summer has also curbed demand for mortgages.
“A lot people, particularly outside of Quebec, accelerated their decision to buy a home because of the implementation of the HST,” Robitaille said. “So, that probably explains why in the first six months of this year, the (loan) volume was very impressive.”
Tim Hockey, head of Canadian banking for TD Bank Financial Group, said the lending slowdown would likely pinch overall revenue growth.
“(We’re) not sure yet whether at some point there won’t be some deleveraging in the Canadian consumer household debt rates, if you will,” said Hockey. “But that is something we worry about a little bit.”
He also suggested there is some evidence Canadians are becoming wary about applying for new credit cards via those once ubiquitous industry “mail drop” applications. Said Hockey: “The response rates to those mail drops have plummeted.”
Separately Wednesday, a new economics report by CIBC World Markets suggested that Canada’s economy has “muted growth prospects through 2011,” which will make consumers more cautious about using credit.
“Together, the negative wealth effect from housing and reduced use of credit will pare enough purchasing power from consumers to limit growth in consumer spending to under 3 per cent next year,” the report said.