Bank of Canada must open people's eyes to debt sinkhole danger: Don Pittis

There is a risk thatCanada will fall into anOttawa sinkhole of debt, and worse, there is a serious dangerthat Canadians will tumbleinwithout having understoodthe hazard. But there is something the Bank of Canada could do about it.

As we saw on Thursday, Bank of Canada governor Stephen Poloz appears terrified of disturbing our economic road built on inflated house prices and unsustainable debt. Poloz repeatedly said he is not predicting a real estate downturn, just that "the risk, whatever it is, is growing."

• House price increases in Vancouver, Toronto likely unsustainable
• Bill Morneau promises 'deep dive' intohousing bubble

As Canadian personal debt keeps bouncinghigher, the question is whether individuals signing on the dotted line for enormous loans actually realize what they are getting into.

Evidence from Newfoundland and Labrador, where house prices have begun to fall just asother costs are rising and job markets weaken, indicates that Canadians really don't understand the dangerous downside of overwhelming debt.

"They're feeling like the goal posts have moved," says RobinWhitaker,a St. John'santhropologistinterviewing first-time homebuyers to studythe effect of debt on the lives of ordinary people. She says anxiety levels areincreasing as the provincial government's austerity budget pushesup the annual cost of livingby as much as $6,000 per household, according to some estimates.

"Quite a few peopleare feeling like they did all the right things you are told to do," saysWhitaker. "About making sure you're careful. Making sure you can afford it.And all of a sudden their expenses are rising."

In such a situation, the loss of a jobor a forced move whilehouse prices are well below what the family paidcould be devastating for household finances.

Willingness to push the limit on debt isn't just a Newfoundland problem. It's just that they are on the other side of an unexpected financial crisis that could just as easilyhappen in parts of the country where people remain exuberant,such as Toronto and Vancouver.

"We all as consumers have difficulties with self-control," says Saul Schwartz, an expert in consumer debt who teaches behavioural economics at Carleton University. "That means you drink too much and get a hangover, you eat too much and gain weight, you buy things and end up more in debt than you wanted to be."

But while the urge to have it all now is onereason for growing consumer indebtedness, Schwartz saysit'sonlyhalfof the problem.

"Lenders, retailers, anybody who you might be buying things from, takes advantage of that lack of self-control and they are not sufficiently regulated," Schwartz says.

Anyone can make a mistake, but Schwartz says people who understand very little about how financial markets, mortgages and interest rates work often make long-term commitmentswithout really understanding the long-term costs and long-term dangers.

Attracted by low interest rates,manageable monthly payments and property prices that they think have nowhere to go but up, many optimistic Canadians are just a job loss or rate rise away from trouble.

While the Bank of Canada is reluctant to raise interest rates, law professor Lauren Willis has devised a scheme she says would assure regulators that consumers aren't getting in over their headsat least not without realizing it.

"If you go out and survey people, you find out that people have no idea what they agreed to, or that they think theyagreed to theopposite of what they actuallyagreed to," says Willis, citing a U.S case where people signed up for a credit card online without even realizing it.

She proposes something called"customerconfusion testing." She says it is especially essential in an era when people can sign up with an online click. And when sales agents are motivated by commissions.

Conventionalconsumer rules instructbusinesses on the wording or type size of theinformation they must provide. Instead, Willis wants regulators to put the onus on the companies to prove customers have actually followed the bouncing ball.

"Instead we need to say: 'You must produce random sample consumer testing that shows at least 75% of your customers understood,'" she says.

• High house prices making home ownership an unaffordable dream
• 'Crazy' real estate bidding warsinfect the suburbs

Willis says outside agencies could be hired by the firm at a reasonable cost to do the testing. And if the company fails the comprehension test? Then it's back to the drawing board until it does.

"Maybe people don't enjoy reading," she says."Maybe they'd rather watch a video."

It would be up to the seller or lender to make sure the customer understands.

If the propertymarkets crashed today, there is little the Bank of Canada could do to prevent homeowners from suffering losses. Perhaps that's why Poloz was so reluctant to entertain that possibility.

But making sure people truly understand the potential consequences of buying into a propertymarket that Polozcalls"unsustainable" mightprevent the problem from getting worse. And at least the people making a long-term commitment that will affect their lives will be going in with their eyes wide open.

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