TORONTO (Reuters) - The two giant jars on Randolph Taylor's windowsill are filled with shards of credit cards, chopped up by the clients whose staggering indebtedness drove them to the front line of Canada's household debt crisis.
"I used to cut them up myself, but then I saw that having them do it themselves was a huge symbolic act," Taylor said, pulling out a pair of scissors from his desk drawer in the Toronto headquarters of debt counseling agency Credit Canada.
"I tell them this card is the reason they are here. This card is the reason they haven't been able to sleep."
The growth of household debt in Canada to levels approaching those seen in the United States before the 2008-2009 crash seems to be keeping a lot of people awake - from central bankers to economists, lenders, real estate agents and the indebted consumers.
Bank of Canada Governor Mark Carney has warned that the ratio of debt to income will rise from the already alarming 153 percent record reached last year, and many think it will approach the landmark 160 percent hit by the United States before the U.S. tipped into crisis more than three years ago.
Graphic on Canada vs U.S. debt growth: link.reuters.com/zat36s
While Canada has spent the last few years boasting of its escape from the global credit crisis and its quick recovery from recession, both Carney and Finance Minister Jim Flaherty are sounding the alarm on household debt, warning it has become the biggest home-grown risk to the financial system.
"Obviously the biggest concern is taking extreme levels of debt for those who are most vulnerable," Carney said in mid-January, pointing to a "potentially overvalued" housing market that has roared higher for years, barely pausing when the U.S. market collapsed.
Carney, like central bankers the world over, has dropped official interest rates to historic lows to bolster growth, and suggested borrowing costs will remain low. The fact that his own policy made borrowing so attractive has not lessened his warning that sharp pain may come when rates do rise.
The constant cry about household debt from Carney and Flaherty has sparked a debate about just how bad the problem is, with most concluding that it is quite worrisome and will end badly - but not as badly as in the United States.
"I am concerned about household debt. I do think ultimately this is going to end in tears, because inevitably rates are going to rise. And when they do rise, I think it is going to be a real shock to people," said Craig Alexander, chief economist at Toronto-Dominion Bank, Canada's second-largest lender.
In December, TD estimated the average Canadian home was overvalued by about 10 percent, while others have predicted a 25 percent drop in house prices. That would leave many homeowners underwater, unable to service their debts and risking default.
Still, Alexander said Canada's more conservative lending culture may spare it from a U.S.-magnitude crisis.
"I don't think we'll have a U.S.-style problem ... (because) financial institutions have been very prudent lenders, so we don't have the same systemic risk the United States had."
The Canadian Bankers Association, which lobbies on behalf of lenders, points out that 68 percent of household debt is residential mortgages - loans that are backed by an asset and increase an individual's net worth. Twenty percent comes from lines of credit and only 5 percent is credit card debt.
Mortgages are more conservative as well, with next to nothing of a subprime market.
The news on mortgages would be downright rosy except nearly everyone thinks home prices are unsustainably high, particularly in the two largest markets, Toronto and Vancouver.
Eerily reminiscent of the U.S. housing market five years ago, houses are listed mid-week, packed with buyers over a weekend open house, and sold, often with multiple unconditional offers well above the asking price, two days later.
"If a house goes on the market in a good area, it is insane. Anything under C$1 million, the activity at the public open house is nutty," said Toronto real estate agent Valerie Cowie.
Cowie, who has been in the business for 10 years, estimates that more than 80 percent of homes in the "active market" - priced under about C$1.2 million - get multiple offers these days.
And while it sounds like a good time to be a real estate agent, Cowie said it is hard on both buyers - who must bid wildly higher to win a house - and on sellers, who risk a deal falling through when the bid fails to be appraised at the higher price.
"The day will come when the seller can't just ask for more, when the buyer won't pay it. I look forward to that day. I look forward to the day the buyers just say no. No more," Cowie said.
The strength of the housing market is at the crux of the debt story in Canada, where home ownership is above 67 percent.
Prices in major markets have marched higher for a decade, at an often double-digit pace. Housing prices rose 7.2 percent last year while home sales increased 9.5 percent to C$166 billion, according to the Canadian Real Estate Association.
While price increases appear to be cooling, competition to get into the market has spurred new homebuyers to stretch hard before they are priced out altogether.
Debt counselor Taylor - the one with the scissors - has heard horror stories about unmanageable mortgage debt.
"I've seen people whose mortgage and property tax payments, together, eat up more than 70 percent of their net pay. It should never be more than 35 percent," he said.
With housing eating up income, borrowers turn to credit cards or home-equity line of credit - the Canadian version of the U.S. refinance game - to pay for food and living expenses.
"They are borrowing from Peter to pay Paul," Taylor said.
Credit cards are not hard to get. Just ask Michael Dynes, a seasonal concrete worker who found himself with C$140,000 in debt spread across 15 credit cards, plus a mortgage on his home in the resort town of Collingwood, 160 km (100 miles) north of Toronto.
"I always had a decent job, and credit was always easy, a little too easy, to get. And it compounds and compounds until you find you are paying more interest than you're actually earning," Dynes, 63, recalls of his debt crisis, which came to a head about seven years ago after he bought a boat, upgraded his house and added furniture.
"I think greed takes over, the want to be like everyone else, to have toys and bells and whistles," he said. "I'm not a drinking man either, nothing like that. I'm just an average person who got way over their head."
Laurie Campbell, executive director at Credit Canada, a nonprofit credit counseling agency that is funded by banks, retailers and other lenders, blames consumers, not lenders, for the credit mess she sees on a daily basis.
"What's changed in the last 20 years is a 'buy now, pay later' mentality - savings have all but disappeared," said Campbell, a 21-year veteran of the credit counseling business.
"A correction will hurt. There is no doubt in my mind, a correction will end up a landslide. It's a domino effect," said Campbell, whose north Toronto counseling office offers advice pamphlets in Spanish, Farsi, Russian, Tagalog and Chinese, as well as a crate of stuffed toys for children to play with while their parents are counseled about the family's future.
While Canadian unemployment - at 7.5 percent still well below the U.S. rate of 8.5 percent - seems to be holding steady, Campbell believes Canadians are not as well employed as they used to be, with fewer benefits and lower pay.
Real disposable income fell by 0.1 percent during the first three quarters of 2011, as inflation snapped back from the recession more quickly than average wages.
So far, Canadians appear to be managing their growing debt load. Just 0.39 percent of mortgages were in arrears as of late 2011, in line with historic averages. The credit card delinquency rate was 1.05 percent in mid-2011, down from a 2010 peak of 1.34 percent, the Canadian Bankers Association said.
But the risk of higher rates looms - a boogeyman so long delayed that consumers may have stopped believing easy credit will ever end.
The U.S. Federal Reserve recently extended its vow to keep rates low through late 2014, a move expected to keep Canada's official interest rates low for longer as well.
The prospect of easy money for years to come doesn't ease Alexander's concern about Canadian debt levels - it heightens it. Sure, it's cheap to service debt, but more and more gets piled on as consumers see a 3 percent mortgage as normal.
"Every time I say 'Be careful, interest rates are going to go up this year,' we get to the end of the year and they haven't gone up. And then the next year I say the same thing," Alexander said.
"I feel an awful lot like the little boy that cried wolf. But I always remind people that the wolf does show up at the end of the story."
Editing by Janet Guttsman and Rob Wilson