from CBC, also in Star... Debt leaving many on the brink: Scotiabank
FROM CANADIAN PRESS Record levels of indebtedness have left North American households vulnerable to any significant reversal in economic fortunes, Scotiabank economists say. According to a report today, rising home values and higher stock prices are boosting household net worth and helping to insulate borrowers from the ongoing rise in indebtedness. Nevertheless, savings and liquidity have continued to weaken, suggesting the financial cushion supporting households is probably inadequate to protect against a sustained rise in interest rates or a severe correction in the housing market. "The debt-financed consumer spending spree in the United States and Canada is not letting up, pointing to even higher levels of household indebtedness in 2004," says Scotiabank senior economist Adrienne Warren. "The key factors underpinning borrowing - affordability, rising property values, immigration, dual incomes and asset diversification - are still broadly supportive." The bank estimated a one percentage point increase in the average effective interest rate over five years would lift debt servicing costs as a share of after-tax income to almost nine per cent from the current 7.5 per cent level. However, the bank also noted the immediate impact of rising interest rates would be diffused by the significant amount of refinancing activity that has basically locked in low borrowing costs. "Though the current economic and interest rate environment is relatively benign, debt service burdens are highly leveraged to a significant rise in borrowing costs," said Scotiabank deputy chief economist Aron Gampel. "No less problematic would be the sharp deterioration in underlying economic circumstances, such as job losses, slower income growth or declining home prices."
