It’s been an interesting year in terms of the headlines for consumer debt in Canada in 2015. Just last week I read a headline, “Household debt still rising, but most Canadians in decent shape: experts” followed by the secondary line, “Bank of Canada worries some Canadian households may be over their heads”. Could we be any more contradictory?
Basically, it’s all a big gamble. Assuming interest rates do not rise quickly (or at all), assuming the economy in Canada largely holds together, and assuming there is no downturn, even small, in the housing market, most Canadians will be fine. However, this is not true for all Canadians.
As the Bank of Canada recently reported, 8% of households in Canada have a debt to income ratio of more than 350% of their gross income. That’s double the rate going into the 2008 financial crisis. We know that insolvencies in Canada peaked at a rate of 5.8 per 1000 adults in 2009, the year following the crash. So a doubling of the household risk rate does not bode well in the event our economy sputters. Most economists don’t predict another crash, however, I don’t think it’s going to take something that catastrophic. If you keep filling a glass, even a drop at a time, eventually you reach the top and even a small nudge will cause some water to spill over the edge. I believe our debt driven economy is like a glass not half full, but nine-tenth’s full. It’s not going to take much to spill some water.
Put another way, the Bank of Canada’s numbers equate to 720,000 individual households. Compare that to the fact that we expect to file around 121,500 insolvencies in Canada in 2015. Yet 2015 was a reasonably healthy year for indebted consumers. Interest rates remained low, allowing them to keep up with their monthly payments. However, look what has happened in Alberta, Saskatchewan and Manitoba. Delinquency rates have begun to rise in those provinces as have insolvency rates. And it didn’t take long for the job losses in oil-producing provinces to have an impacted on those with heavy debts. Instead, the impact happened in months, not years.
Looking at our infographic below we know that:
- Household debt reached a record 1.89 trillion in the third quarter of 2015.
- Canadians owe on average $1.64 for every dollar they earn and their debt is rising faster than their income.
- Mortgage debt was up more than 5%, fueled by higher housing prices and the desire to get in at all costs.
- While largely ignored by the media, consumer credit also grew, rising 2.8% year over year. That’s debt that is incurred largely to meet our desire to buy ‘things’ and doesn’t build much value in the long term. This debt actually concerns me most as it’s usually the tipping point for most people and it’s often the most expensive debt.
- Yes, interest rates are low, keeping the average cost to carry in terms of interest at 6.3% of income. However…
- Canadians on average are spending more than 14% of their disposable income on debt payments when you include principal. With rising debt loads, principal payments have risen considerably, offsetting any gains made in terms of low interest rates.
- As mentioned, 8% of households have are considered high risk by the Bank of Canada.
- That’s 720,000 individual households who need to take action now to deal with their debts.
- If they don’t, they risk being one of the 121,500 or so people who we estimate filed insolvency in 2015.
- And this number has significant potential to rise dramatically. The consumer insolvency rate in Canada peaked at 5.8 for every 1000 adults in 2009, the year after the financial collapse. And remember, we now have double the number of Canadian households at risk compared to then.
I don’t like debt and neither should most consumers. In my view, 2016 is going to bring a lot of challenges. Make sure debt isn’t one of them.