A new report from CIBC World Markets warns that Canadian households are deeper in debt than a year ago and are vulnerable to any economic shock.

“Our analysis suggests that the apocalyptic scenarios about a potential collapse of the credit market are highly exaggerated, and not supported by the evidence,” says the report by economist Benjamin Tal. “But we also found that a complacent approach towards the rapid pace at which Canadians borrow is similarly misleading and dangerous.”

The report says Canadians are 7% more indebt than they were a year ago and 20% worse off than at the beginning of the decade. During the first three quarters of 2004, personal disposable income rose by only 3% while households increased their borrowing by 7.5%. Moreover, since 1989 growth in household debt outpaced growth in income by an annual average of more than three percentage points.

“Individuals, financial institutions and policy makers ought to realize that households’ heavy reliance on debt does not come without a cost. The cost is an increase in households’ vulnerability to economic shocks, be it a notable increase in interest rates, an economic slowdown, or even potentially a rapid surge in the value of the Canadian dollar. Heavy borrowing today means reduced economic flexibility tomorrow.”

Tal says personal lines of credit are the new darlings of the current debt market with total outstanding rising by a “whopping” 30% in 2004.

He notes that not all of the growth in debt is new debt, with the growth replacing more traditional loans such as term loans and credit cards, the latter of which are increasing at half the pace of the late 1990s, Still, with mortgage debt growing by 10%, total household credit in 2004 registered its strongest showing in 15 years.

The report also cautions against using growth in assets, especially real estate, as a benchmark for growth in credit. “At times, changes in the value of assets can be largely volatile due to booms and busts in the real estate and equity markets. In contrast, the growth rate in credit, while relatively rapid, is far less volatile.

“Regardless of the benchmark, debt is rising faster than permitted by the economy’s fundamentals. And what makes this trend alarming is that in many respects, borrowing is, with real wages

Tal says the good news is that, for now, “the sea is calm.”

“Interest rates are expected to remain low in 2005 and recession is not on the horizon. Lest we become too content, it’s worth reminding ourselves that economic shocks are inherently unpredictable.