Canadians are taking out mortgages nearly eight per cent faster than they did a year ago, according to a report in the Globe and Mail, sparking concern that highly leveraged borrowers will be in over their heads when interest rates rise.
"We know that cheap money in the past caused some problems. This is a time to be prudent," CIBC economist Benjamin Tal told the Globe, adding that household debt in Canada rose 3.4 per cent in the first half of the year and the debt-to-income ratio rose to 140 per cent. In the meantime, U.S. consumers have been steadily increasing their rate of savings.
The report warned that borrowers' decision to take on bigger mortgages is not consistent with larger paycheques and could be problematic if housing prices take a hit once the buying frenzy cools down. There are also concerns of a housing "bubble" due to the high number of sales and the pace of price increases.
"It's environments like these that breed bubbles," ING Direct Canada CEO Peter Aceto told the Globe. "There is what feels to be a little bit of irrational behaviour in the real estate market, and I do think it's in a large way fuelled by how low interest rates are."
Mark Carney downplayed the risk of a housing bubble in a recent speech, saying he expects the real estate market to cool down by 2011. He added he will take necessary measures if low interest rates continue to spur out-of-the-ordinary activity.