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Debt-mired Canadians may long for Carney’s warnings

Who could blame Mark Carney for taking the Bank of England's top job? George Osborne, the United Kingdom's Chancellor of the Exchequer, pulled out all the stops as he courted Canada's hard-to-get central banker.

A 60-per-cent raise on Sir Mervyn King's salary, a lavish flat in central London, a fast-tracked U.K. citizenship: Hey, if someone offered me such a deal, I would be on the first flight to Heathrow.

"I am going to where the challenge is greatest," Mr. Carney says. The understatement is as big as the crowd of 2.5 million British citizens who are looking for a job. While the U.K. has barely emerged from its second recession since the financial crisis, continental Europe is still contracting – and that is where half of the country's exports are normally destined. Is triple-dip even a word?

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The banking system – partly stated-owned and with no exit in sight – is still in convalescence. And to fix the British economy, Mr. Carney will have to shake up the "Old Lady of Threadneedle Street" and its 318-year old habits.

Really, who could blame Mr. Carney? In comparison, Canada is a bore. Our tepid growth is still growth – for now. The country should expand 2 per cent this year, 1.8 per cent the next, according to the latest Organization for Economic Co-operation and Development projections.

Problem is, things might get much more interesting on this side of the Atlantic in a not-so-distant future. And since Canada's household debt predicament can arguably be traced to the low-interest-rate policy the Bank of Canada has prolonged long after the financial crisis, the country might have liked the "best, most experienced and most qualified person in the world," as Mr. Osborne said, to stick around a little longer.

Consumer debt is at an all-time high. Household credit debt in relation to disposable income has risen to a staggering 163 per cent in the second quarter of this year. Canadians are now more indebted than either the Americans or the British.

Roughly two-thirds of household debt is tied to mortgages. This shouldn't surprise anyone given the low interest rates and bidding wars that have pushed up housing prices to high-rise heights in cities like Vancouver, Toronto, and even Montreal and Quebec City.

As the laggard market of Quebec was playing catch-up, home prices in the province jumped 122 per cent between 2000 and 2010, compared to the 107-per-cent increase for Canada as a whole, according to the Quebec Federation of Real Estate Boards. The buying frenzy was noticeable in Quebec City (159 per cent) and in Montreal (133 per cent). And while Finance Minister Jim Flaherty's stricter mortgage rules have cooled off speculation in Vancouver and Toronto, the Canada Mortgage and Housing Corp. still predicts housing prices to rise in Quebec, albeit moderately.

Granted, the Bank of Canada does not set mortgages rates, with the notable exception of floating rates, whose variations mirror its overnight lending rate. Rather, mortgage rates are guided by the bond market, which is influenced by inflation expectations.

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However, the Bank of Canada dictates the interest rates at which Canadians finance much of everything else they buy. And the overnight rate, the barometer for credit lines and other consumer debt, has been glued to its floor level of 1 per cent for more than two years. No wonder consumer credit has been keeping pace with mortgage debt, and has not shrunk in proportion to total household debt.

To his immense credit, Mr. Carney has warned Canadians time and again on their dangerous shopping frenzies, especially when mortgage-backed loans are used as credit cards. Yet he has cried wolf so often that consumers appear oblivious to their debt loads. A small interest rate hike might have gone a long way in waking up Canadians to the dangers of indebtedness, even if the country's economic recovery remains fragile. Not to mention this would give a long-awaited break to savers and pension fund managers, who desperately need higher rates to meet their retirement obligations.

Drunk with debt, are Canadians in for a long and painful hangover? Or will they just sober up slowly? Fortunately or unfortunately, depending how you see it, Mr. Carney will now be a five-year term and a six-hour flight away.

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About the Author
Chief Quebec correspondent

Sophie Cousineau is The Globe and Mail’s chief Quebec correspondent. She has been working as a journalist for more than 20 years, and was La Presse’s business columnist prior to joining the Globe in 2012. Ms. Cousineau earned a master’s degree in journalism from the University of Illinois and a bachelor’s degree in economics and political science from McGill University. More

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