If the global recession deepens, a growing number of Canadian households could be driven into foreclosure by crushing consumer and mortgage debt, the Bank of Canada warned Thursday.
A faltering economy - coupled with rigid credit markets and lower incomes - could create a perfect storm that would swamp vulnerable households right across the country, the central bank said.
"With household balance sheets under pressure from weak equity markets, softening house prices, slowing income growth, and record-high debt-to-income ratios, a severe economic downturn could result in a substantial increase in default rates on household debt," writes the bank in its December financial review.
But Tom Velk, an economics expert at McGill University, downplayed the report and said it casts far too much doom and gloom.
"It's too easy to get rolled (in) with the enthusiasm for pessimism," he told CTV Newsnet Thursday. "Less than 1 per cent of Canadians are in real trouble with their mortgages."
Even if the recession deepens, Velk estimated that the number of Canadians who could experience a foreclosure would top out at about three per cent.
In short, Velk said the economy is simply going through a cyclical recession, and that too much worry among the public could makes things worse.
"It's not right, and it's not good and it just gets everybody ... in the mood where they don't want to make sensible investments," he said.
According to Velk, Canadians should think about investing in the stock market now, given the rock-bottom prices.
"The Warren Buffetts of the world are buying now," he said, referring to the investment guru and multi-billionaire.
Patti Croft, an economist with RBC Global Asset Management, said that while Canada likely won't have a rash of home foreclosures like in the U.S., Canadians are currently carrying record-high debt loads.
Croft told CTV Newsnet Thursday that if the recession gets worse, it could get harder to manage that debt.
"There's potentially less assets to service those debts ... and that could cause people to default, or could cause home foreclosures as well," she said.
However, Croft stressed that debt levels in Canada are much lower than those in the U.S. and United Kingdom.
Things will get better: report
The Bank of Canada report suggests the "most likely" outcome is that global financial markets, and Canadian credit conditions, will gradually improve "as the various extraordinary measures aimed at resolving the crisis take hold."
There were few hard-and-fast predictions in the statement about how Canada will be affected and how long it will take for consumer confidence to rebound. But the statement was clear that Canada has been affected by the global slowdown and will continue to feel pressure.
"The Canadian financial system has proved relatively resilient throughout the crisis, owing to lower leverage and more conservative lending practices, but it has not been immune to spillover effects," the statement said.
"In particular, strains in Canadian wholesale funding markets have been significant in recent months, and this has impeded the normal functioning of the financial system."
The report warns it's still possible that the situation here could take a turn for the worse, driven by panic linked to household debt.
"Household indebtedness could act as a channel of contagion spreading losses through the Canadian financial system and causing a further tightening of credit conditions," it said.
"The impact on the balance sheets of financial institutions would, however, be substantially mitigated by mortgage insurance."
