We’ve all seen the devastating effects of the housing market bubble on the US economy. And, for years, we in Canada have kind of looked down on the United States for the loose lending standards and high level of household debt.
However, Canadians may not have much to crow about soon. Canadians have surpassed Americans in household debt, and there might be a mortgage bubble growing as well.
Are Canadians Borrowing Too Much?
The current global climate has prompted a low-rate environment that encourages borrowing, and Canadians have been taking advantage. The Economist reports on the low rates and the increase in borrowing in Canada:
In response to America’s slow economic recovery and uncertainty in Europe, the Bank of Canada has kept interest rates at record lows. Five-year fixed-rate mortgages now charge interest of just 2.99%. In response, Canadians have sought ever-bigger loans for ever-costlier homes. The country’s house prices have doubled since 2002.
All of this home buying has prompted a rapid growth in home prices. And, as a result, speculators are becoming a regular part of the market. With home prices rising so rapidly, at some point there could be an end to the growth. Indeed, some worry that the real estate market is in a bubble, and that it could burst soon — leaving Canadians overburdened with under water mortgages and high household debt.
The concern is that Canadians have been borrowing too much, and there could be a reckoning for all of that debt. The Canadian economy has increasingly become dependent on consumers for its growth. One of the real fears is that the global economy could slow down again, and that the burgeoning economic recovery in the U.S. could go off track. As long as Canada retains its strong exports, the economy should be able to offset some of the effects of a housing bubble. However, if a global economic slowdown occurs again, Canadians might find themselves in an even worse position as household debt climbs.
What Should You Do?
Instead of being a statistic related to climbing household debt, it’s best to do what you can to shore up your finances. Prepare for the future by paying down debt, building your emergency fund, and even trying to increase your income if you can. Diversify your investments and get ready for what might be next for the economy — and it’s effect on your finances.
In the end, using the best Canadian credit cards isn’t a bad thing. However, you do need to be careful. Live within your means and pay off your credit card balance each month. You will be able to take advantage of the convenience and perks, without paying the interest, and without becoming indebted.