OTTAWA, TORONTO -- Over the years, small business owners Karie and Randy Dick of Didsbury, Alta., have borrowed steadily to accumulate Alberta real estate. They own two RV lots in Pine Lake and an 80-acre farm, and have watched their valuations soar over the past decade.
In January, the couple, both 42, added a retirement property, this time in the U.S.: a new four-bedroom, two-bathroom, fully-landscaped house in Phoenix for $165,000 (U.S.).
To close the deal, the Dicks took a risk that might seem counterintuitive at a time when economists are warning of slowing economic growth in Canada and a credit crunch is squeezing the U.S. and Europe: They borrowed $100,000, significantly adding to their family debt load.
Household credit in Canada is growing by a more than 10-per-cent annual pace right now, according to Bank of Canada data. That's a pace normally associated with boom times.
Like the Dicks, many households are still borrowing heavily, even as the United States sinks toward recession and Canada seems headed into a downturn. "It's such a sweet deal it wasn't even funny," said Ms. Dick of the Phoenix home, which the couple views as a retirement property. "We have always said, the time to buy is when everyone else is selling."
Despite gloom-and-doom reports about recession in the United States, frantic action by central banks around the world to inject liquidity into short-term credit markets, and widespread market turmoil, households in Canada are borrowing and buying like nothing has happened.
"From the household side, it's a case of 'Crisis? What crisis?' " said Douglas Porter, deputy chief economist at BMO Nesbitt Burns.
Household credit grew 1.0 per cent from a month earlier in January, according to the Bank of Canada data. Both mortgages and consumer credit, which together make up household credit, are expanding at a rate of over 10 per cent a year.
The central bank has been lowering its key interest rate steadily since September, but not all lending rates have followed the central bank down. Many mortgage rates have stayed the same, although short-term mortgage rates have come down.
Plus, discounts for good customers have evaporated, as the global credit crunch prompted financial institutions to take a second look at their lending practices.
The borrowing trend speaks to the strength of Canada's domestic economy, even as overall economic growth is slowing significantly this year.
Canada's job market, consumer demand and housing market are all humming along merrily even as exports have been gutted by weakening U.S. demand, high energy costs and a strong Canadian dollar.
"Domestic demand has remained impervious to what we've seen on the export side and the slowdown in the U.S. economy," Mr. Porter said.
But he, like many economists, has been puzzling over why the two sides of Canada's economy - consumption and output - don't feed off each other more.
"It's why we continue to shake our heads every month when the job numbers come out," he said, referring to consistently strong job creation at a time when economic output is slowing.
Part of the answer lies in high commodity prices, which bring a steady gush of income into Canada despite the strong currency.
And those prices seem to want to stay high - for now - even as the United States fights off recession.
And part of the answer lies in the nature of the Canadian housing market, says Benjamin Tal, economist at CIBC World Markets.
Much of the American economic weakness can be traced back to 2004, when banks defied interest rate hikes by the U.S. Federal Reserve, and sought to expand lending through increasingly high-risk and exotic mortgage instruments.
Canada hasn't gone through that experience, so here there is no housing bubble to pop or scare away borrowers and lenders, he said.
But there are growing signs that the credit crunch will eventually take a toll, economists warn.
Mortgage brokers say they have noticed changes in the behaviour of both borrowers and lenders over the last few months.
Banks are more inclined to reject loan applications from people who have spotty borrowing records.
Borrowers, meanwhile, are being more careful about the loans they take, seeking more advice from financial planners and weighing features beyond just the interest rate they pay.
As well, while overall credit growth may be strong in Canada, it is significantly weaker in Ontario and the East than in the West, Mr. Tal notes.
And the number of anecdotes that Mr. Tal hears from small and medium-sized businesses having trouble finding credit is definitely on the rise.
It's only a matter of time before the economic trouble in the United States and in Central Canada bring Western Canada's housing and credit growth back to earth, economists said.
"We are at the peak of the cycle as far as credit is concerned," said Mr. Tal.
© The Globe and Mail
