07/29/2015 04:09 EDT | Updated 07/29/2015 04:59 EDT

Harper Says High Debt Levels A Sign Of Consumer Confidence, As Consumer Confidence Drops

Prime Minister Stephen Harper says Canadian consumers’ high debt loads are a sign of confidence in the economy.

But Harper’s comments come as two separate measures of Canadian consumer confidence showed steep declines in recent weeks.

Though the government is concerned about some borrowers’ ability to pay, overall Canadians’ balance sheets “are good,” Harper said in an interview with Bloomberg Wednesday.

“We don’t believe there’s any data that suggests any kind of a pending crisis there,” he said.

“People have confidence in their ability to afford larger houses in the future, but obviously for those who are over-extended we’ve urged some caution.”

That confidence may now be fizzling, in light of the oil price collapse that sent Canada’s economy into negative growth mode for at least the first four months of the year.

The Bloomberg Nanos Canadian Confidence Index hit a two-year low in the latest survey, released last week. The index fell to 53.41 from the previous week’s 55.

“The forward look on the economy has taken an exceptionally sharp negative turn dropping five full points over the last four weeks,” Nanos Research chair Nik Nanos said in a statement.

The Nanos numbers were backed up by data this week from the Conference Board of Canada, whose own consumer confidence index dropped 4.1 points in July, to 98.6. All parts of Canada are seeing falling consumer confidence, except Quebec and the Maritimes, the survey showed. The Conference Board also slashed its outlook for Canadian growth, to 1.6 per cent in 2015, the worst performance for Canada's economy since 2009, when the world was in the grips of a financial crisis.

Consumer confidence is declining against “a backdrop of the loss of current and anticipated household wealth,” thanks to falling oil and stock prices, and an expected downturn in employment, Robert Lawrie of Bloomberg Economics said in a statement.

Canadian household debt was near an all-time high in the first quarter of 2015, with the average household carrying a debt burden of 163.3 per cent of income, down slightly from 163.6 in the previous quarter.

The high debt levels have prompted some analysts to declare that Canada’s house prices are unsustainable. David Madani of Capital Economics predicted this week that Canada’s housing markets could see price declines of up to 30 per cent.

But many economists — particularly those at the large Canadian banks — agree more or less with Harper’s outlook. They argue that years of low interest rates have brought down mortgage costs for many Canadians, making monthly payments more affordable.

They note that while house prices may be hitting new record highs all the time, mortgage payments as a percentage of income are low today, by historical standards.

This chart from finance blog shows Canadian mortgage payments fell even as debt levels rose, thanks to falling interest rates.