Behind S&P's warning on Canadian banks lies a troubling message, one we've heard before but bears repeating.
"The current mix of international and domestic macroeconomic conditions could bring about a rising level of unemployment and further constrain income growth for Canadian workers," Standard & Poor's Ratings Services warned late Friday.
"These developments may potentially impair consumers' debt servicing capacity and amplify Canada's vulnerability to a housing market correction at some point in the future."
S&P revised its outlook on seven financial institutions to "negative" from "stable," including Royal Bank of Canada, Toronto-Dominion Bank, Bank of Nova Scotia, National Bank of Canada, Laurentian Bank of Canada, Central 1 Credit Union and Home Capital Group Inc.
"A prolonged runup in housing prices and consumer indebtedness in Canada is in our view contributing to growing imbalances and Canada's vulnerability to the generally weak global economy, applying negative pressure on economic risk for banks," S&P said.
Like the Bank of Canada and the federal government, S&P is fretting over the fact that the ratio of debt to disposable income among consumers has climbed above 150%, and consumer debt relative to gross domestic product to more than 90%.
Over the 10 years in which this occurred, house prices in Canada doubled, and after the "brief correction" in 2008 surged again, now some 10% above the last peak. Many observers see Canada's housing market moderating, rather than crashing.
The government's attempts to act on debt and house prices have so far "done less than we expected to counteract the growing level of consumer leverage and housing market risk in Canada," S&P said, though it does expect they will have some impact. Finance Minister Jim Flaherty brought in another round of new rules earlier this month aimed at cooling things down.
Still, Canada's economy recovery is weak given the global troubles, and this could hold back consumer spending, it said.
