Debt loads decreasing: CIBC

Canadians appear to be heeding the advice of the Bank of Canada and Ministry of Finance and getting their household debt loads under a control, a new report from CIBC found Wednesday.

"After coming through the most leveraged period of consumer spending in recent history, the bank's economist Benjamin Tal said, "Canadians are getting the message that they need to cut back on their debt levels."

Adjusted for inflation, household debt grew at the slowest pace inalmost a decadein the third quarter of 2010, Tal noted. And everything from mortgage arrears to lines of credit and credit cards outstanding are showing improvements.

Policy makers have repeatedly warned Canadians in recent months not to over leverage themselves during the current low interest rate environment. After taking steps to cool the housing market in 2008 and again in 2010, Jim Flaherty unveiled new measures earlier this month.

On Wednesday, he reiterated the debt message at an event in Oshawa. "Moderation is key," the minister said. "We were seeing some excesses in the mortgage market," by individuals loading up during the current environment of low interest rates.

"Over time,interest rates are going to go up," Flaherty reminded Canadians Wednesday, a message Bank of Canada governor Mark Carney has echoed in recent policy announcements.

The CIBC report found that Canadians are getting that message loud and clear.

Debt is still rising faster than income, but it's no longer rising faster than asset values, Tal'sreport found. Put simply, Canadians are borrowing more, but by and large, they're borrowing to buy things that are increasing in value such as real estate.

After steadily rising since early 2008 before the full force of the slowdown was felt consumer bankruptcies are on a clear downward trend. Government data shows the three-month moving average is now falling by about 25 per cent, on a year over year basis.

The year over year change in premium credit cards outstanding has fallen from more than 40 per cent 10 years ago, to virtually flat today, the report found. "Recent delinquency figures reveal an improving trend," Tal said.

Overall, debt interest payments now account for 7.2 per centof disposable income the lowest debt service ratio since the middle of2006.

While an encouraging sign for individual finances, the move away from debt could have some negative impacts for the economy, most notably a decrease in consumer spending, Tal said.

"Growth in consumer credit is already decelerating," Tal said, "And as the ratio of growth in borrowing to spending returns to normal in 2011, look for growth in consumer expenditures to take an additional haircut."