The micro-examination of debt in Canada suggests the problem may be more serious than thought and sheds new light on Bank of Canada governor Mark Carney's statement last week that he is most worried about "vulnerable" households.
The raw numbers are bad enough. The ratio of household debt to disposable annual income has been rising steadily since 2007 and recently reached a record 153 per cent.
That puts Canadian households on the doorstep of the 160 per cent level, where Americans were prior to the housing collapse. But as the CIBC report suggests, households in other countries, particularly Denmark, the Netherlands, Norway and Switzerland have reached significantly higher thresholds without triggering a crisis.
"It's not only the amount of debt Canadians are carrying, but how many are getting close to the limit of their borrowing capacity," said CIBC chief economist Avery Shenfeld, co-author of the paper with economist Benjamin Tal.
"It would have been nice to have found that the rise in debt was coming from those with a lot of room to borrow, but instead what we see is those with a lot of debt are piling on more."
Another concern, Shenfeld said, is that Canadians over 45 years old who should be saving for retirement are increasingly dipping into the credit market, a trend likely contributing to the rise in bankruptcies among the 50 and older set.
The CIBC analysis showed one-third of debt carriers are already above the 160 per cent line and that they are wholly responsible for about three-quarters of all the household debt in Canada.
Adding to the squeeze is that income growth has stalled in Canada, falling 0.1 per cent in the first three months of 2011. In the freshest data, weekly earnings were flat in November.
The repercussions of record household debt has been a hotly-debated issue in Canada since central banker Carney began fretting that debt was reaching record highs even as the economy was in recession.
Finance Minister Jim Flaherty, who tightened mortgage rules on three different occasions in as many years, was only able to slow down growth in the housing market.
Last week, economists Craig Alexander and Derek Holt of the TD Bank and Scotiabank respectively suggested the problem may be exaggerated. The household debt-to-income measure was deeply flawed, they argued, and a better gauge would be to assess whether Canadians can afford to make their debt payments. By that calculation, household finances are on firmer ground as long as interest rates stay low.
Shenfeld agreed that a housing meltdown as occurred in the United States is extremely unlikely in Canada.
"There's no magic number that you can say a certain debt ratio is too high," he explained. "The issue is as more Canadians realize they don't have as much room to continue to borrow, we are going to lose some of the economic stimulus benefits of low interest rates."
Most economists have forecast that household spending will slow in the next several years as Canadians seek to build up savings. This partly accounts for why all predict several years of slow economic growth in Canada, barring a major shock.
Also Thursday, the Conference Board of Canada said consumer confidence rose slightly in January, but their willingness to spend money still sits 14.3 points below where it was at the same time in 2011.