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Credit Picture Improving, Says Tal

Benjamin-TalDebt-to-income may be at 148%, but CIBC economist Benjamin Tal says the mortgage picture isn’t as bleak as some have portrayed it.

Here are snippets of his statements from a BNN interview Tuesday:

  • “We cannot talk about the quantity of debt without talking about the quality of debt.”
  • “The quality of debt in Canada is totally different (than in the US before the crisis).”
  • “Subprime in Canada was less than 5% (of overall mortgage volume). In the U.S. it was 33%.”

  • The number of Canadians vulnerable “in terms of very low equity on their house and very high debt service ratio” is 4%.
  • Canadian credit quality has been “improving” for the past few years.
  • Canadian credit growth is now at a “9-year low.”
  • The “Canadian real estate market is stagnating,” which will lead to slower credit growth (because people won’t borrow as much if their homes stop appreciating).
  • Canadians have become more sensitive to a rise in interest rates.
  • When rates rise, “of course you will see some increase in defaults.” However, rates rise for a reason, Tal says—because the “economy is doing better.” When the economy improves, unemployment falls.
  • “The unemployment rate, not interest rates, is the number one factor impacting defaults.”
  • Higher rates will reduce consumption because people are forced to service more expensive debt.

There’s a silver lining to that last point. Some economists believe that higher rates (and lower consumption) will exert a drag on the Canadian economy and self-regulate interest rates somewhat—i.e. keep rates lower than they otherwise would be if Canadians were not in so much debt.

Rob McLister, CMT