2016 was a year we won't soon forget, and early indications are that 2017 will also be very eventful, so it's time to review the events of 2016 and make our predictions for 2017.
Consumer debt reached record levels in 2016, and so did the Toronto real estate market. Both of these milestones leave us with something to be worried about. As Ted Michalos says on today's show:
There is no capacity to save, there's no capacity for anything to go wrong. It's just a dangerous scenario waiting to unfold.
We discussed the trends that we see with our own clients. A lot of the people we meet are working multiple jobs, just trying to make ends meet. Jobs in Canada have increased in 2016, but all of that growth was in part-time positions. From November 2015 to November 2016 Canada added 214,000 part-time positions, but full-time jobs declined by 30,500. This has huge implications for the average Canadian trying to balance their budget:
They're incurring more debt to make up the difference in the fact that their expenses have gone up but their income hasn’t kept pace.
So what can the average Canadian do to help keep themselves in the black? Take the opportunity to conduct a personal debt assessment:
- make sure your debt is manageable,
- don’t increase the level of your debt any further,
- do what you can to reduce it as much as possible.
For more of our discussion and predictions for 2017, listen to our podcast or read the full transcript below.
Resources mentioned in the show:
- Canadian Centre for Policy Alternatives: A Growing Concern, Child Care Fees In Canada's Big Cities
- Canada's Food Price Report - Families could pay $420 more for food in 2017
- Canadian Payroll Association - Canadians living pay cheque to pay cheque
- Manulife Home Owner Debt Survey
- CMHC: Most Canadian Housing Markets Overvalued
- Statistics Canada: Labour Force Characteristics
FULL TRANSCRIPT show #122 with Ted Michalos
Doug Hoyes: As we get ready for 2017, it's time for our New Year's prediction show where we take a quick look back at 2016 and give your predictions and practical advice for 2017.
Let's start bit a bit of history. We all remember the credit crisis of 2008 when many American banks failed and many people in the U.S lost their homes. We weren’t as hard hit in Canada, none of our banks failed, but it did lead to the biggest year ever for personal insolvencies in Canada in 2009. In 2009 in Canada there were over 116,000 personal bankruptcies and over 35,000 consumer proposals, for a total insolvencies filed of 151,000. Almost 67,000 of those were right here in Ontario.
That was the peak. And then personal insolvencies have dropped to 135,000 in 2010, 123,000 in 2011. And then amazingly enough they were at almost exactly 118,000 for three straight years in 2012, 2013 and 2014. We saw a slight uptake in 2015 to just over 121,000. We don’t have the final numbers in yet for 2016 but my guess is it will be the second straight year of increases up somewhere between up to somewhere around 125,000 or 130,000.
So, why is that and what does it mean for next year? Well to find out let's bring in my Hoyes Michalos co-founder and business partner Ted Michalos. So, Ted why is the personal insolvency rate in Canada up in 2016?
Ted Michalos: You don’t have to look very hard for the answer to that if you've been watching what's happening with oil prices throughout the world. Alberta and Newfoundland, both resource dependent markets, have been hit really hard and the insolvency rates are up significantly there.
Doug Hoyes: Well, and interestingly enough the insolvency rate here in Ontario has continued to drop. So, in Canada, like I said the bottom was in 2014 but, in Ontario it fell another 3% in 2015. And although it looks like we'll either be flat or maybe up slightly in 2016. So why is Ontario different than the rest of the country?
Ted Michalos: Well, first and foremost Ontario's not an oil producer so the effects of those price changes across the world haven’t affected us here in Ontario. On top of that we've got the real estate boom, housing prices are just going crazy.
Doug Hoyes: And so what's the impact of that then? How do housing prices go up and reduce the rate of insolvency?
Ted Michalos: Well, I mean something else has happened at the same time, interest rates are still at historic lows. So, people are assuming more debt, consumer debt, they're borrowing against their houses and tapping into the equity to incur more debt because it's cheap. But the labour market is not very strong here in Ontario and there's a number of things going on that don’t bode well for 2017.
Doug Hoyes: Well, so some of that doesn’t sound good so let's kind of break it down here. So, let's start with real estate. We've talked a lot about real estate on this show this year. We've had experts on like Hilliard Macbeth and Ben Rabidoux. So, what do you see happening with real estate in 2017 and how's that going to impact borrowers?
Ted Michalos: So, it's hard to predict. We're not real estate experts. But I see interest rates climbing, which will cool off the market a little bit. The government changed mortgage rules so that should cool off the market a little bit. But there's only so much real estate property available for sale. Toronto is still setting record levels month after month after month. Vancouver's down, here in Ontario things are still up.
Doug Hoyes: And so if you're in debt, let's say you've got lots of credit card debt and that sort of thing, but your house has gone up in value?
Ted Michalos: Then you try to borrow against your house. Let's look at some stuff Manulife did a survey, I think it's Manulife.com/masters-article.
Doug Hoyes: We'll put the links in the show notes.
Ted Michalos: Half the current homeowners are unprepared for some sort of emergency. So they haven’t got savings anymore, everyone has debt. Four in 10 are in trouble just managing their basic living expenses. The reason that they can manage right now is interest rates are so low. One in six homeowners are finding it difficult to meet any kind of increase in mortgage payments.
So the folks that are locked in right now at the low rates are probably okay for the next couple of years. I think it's this week that the Fed in the U.S is probably announcing an interest rate increase. It's going to happen here. Mr. Trudeau likes to spend money. I think the Canadian government is going to run deficits and so interests are going to climb and that's going to make it more difficult for everybody.
Doug Hoyes: Yeah and we don’t know for sure what's going to happen with interest rates. I mean we've guessed wrong for years and years so we won't even predict it. I mean when I had Ben Rabidoux on the show, and I'll put a link to that in, he believes yes, that interest rates will probably rise in the U.S. he thinks it's even possible that in Canada they will drop one more time in 2017. But he also doesn’t think that's going to flow through to the mortgage market so we simply don’t know. But we do know that house prices are way up. I mean what kind of numbers have we seen so far in 2016?
Ted Michalos: So, you're looking at, across Ontario an average increase of 19%. In Toronto it's like 21%, that's an insane increase.
Doug Hoyes: Yeah, that's crazy. I mean you do the math, is that was to happen every year well every house would be worth 10 billion dollars.
Ted Michalos: This is the first year that the average price house in Toronto exceeded a million dollars. That's a psychological level too but it's also insane.
Doug Hoyes: Yeah and that's the average house price. I mean it is kind of crazy. And that's why the CHMC is issued their red warning for the housing market saying, you know, high risk and so on. Obviously, we've discussed the CHMC in this show before too with Michael Chong a couple of weeks ago talking about privatizing it and so on. So, the real estate market appears to be over heated.
So, let's talk about, you know, the average Canadian who's listening to us today. So, how did they do in 2016 and what should they be expecting for 2017? So, let's start with the most important issue for everyone, which is of course employment. Do I have a job? What's the job picture look like?
Ted Michalos: I mean employment's been pretty soft. There have been increases but not significantly and a lot of them are on part-time and in service industries. So, in November of 2015 to November 2016, Canada added 214,000 part-time jobs, while full-time jobs declined by 30,000. It's pretty hard to maintain a family to pay a monthly bills on a part-time job. It means you probably have two, maybe three jobs to make do with what you had before.
Doug Hoyes: Yeah and employers don’t want to have full-time employees 'cause then they have to pay benefits and everything and it's very common. And we see this with our clients all the time, they've got two part-time jobs. I'm getting 20 hours here, 20 hours there and when you add in the time it takes to get from one job to the other they’re putting in 12 hour days to get paid for eight.
Ted Michalos: Well and the last stats I saw indicated that incomes are growing at the rate of 1% and debt levels are rising at a rate of 2.5%. So, people again they're incurring more debt to make up the difference in the fact that their expenses have gone up but their income hasn’t kept pace.
Doug Hoyes: And that's clearly not sustainable either. So, none of that sounded particularly encouraging to me so, let's talk about the cost of buying stuff then. So, the Bank of Canada has predicted that the inflation rate will be somewhere around 1.7% so just under 2% for this year. Once the year is over in 2016 and then not very big price increases into 2017. So, you meet with lots of clients does that sound like reality to you?
Ted Michalos: No.
Doug Hoyes: The government isn’t reality Ted. Is that what you're saying here?
Ted Michalos: That's exactly what I'm saying.
Doug Hoyes: Let me quote you on that.
Ted Michalos: Remember when Mr. Trudeau goes to those meetings, he's promoting the middleclass when people are paying thousands of dollars to see him.
Doug Hoyes: We understand. So, what are you actually seeing for the real, let's forget about what the economists are saying, what do you see for the real people you're talking to?
Ted Michalos: Let's focus on two things that are very important to families. So, what's it cost for daycare? If you've got both spouses working or a single parent, you've got to work, you probably are paying daycare costs. They're saying inflation in general is up 1.7%, the cost of daycare is up 8.5% from 2014 to 2016. Average cost is $1,600 a month in Toronto, which is just crazy. I mean that's twice the cost of going to university.
Doug Hoyes: Yeah that is crazy. And we're getting these stats from The Canadian Centre for Policy Alternatives and we've had them on the podcast here before as well. So, again we'll have links to all of this in the show notes so you can actually read the detailed study. So, okay daycare's a big thing. And the other thing I like to do is eat.
Ted Michalos: Yeah and that's another one. It's a wild card but food costs are predicted to rise for families in 2017. It could be as much as $400 a year or more. And food is one of those things, they treat it as a discretionary expense but it's not. I mean what happens if you have to pay more for you mortgage, for your gas, for your rent, for your car, the place that you cut back is your groceries. You spend a little less on them 'cause you've got less money now. And so you're not eating as well, maybe you're eating stuff that we shouldn’t be feeding our kids.
Doug Hoyes: Yeah because it may be cheaper but not as healthy. What worries about that particularly as we go into the winter is we get a lot of our food from outside Canada. We're not growing a lot of stuff out in the fields in the middle of January here in Canada. So, we're importing it, which means the value of the Canadian dollar has a big impact on what we pay for food and so if the Canadian dollar is weak of course that drives up food costs so that's another pressure point.
So, let's talk about the final topic then, which is the topic of this show, which is debt. So, we know that Canadians are carrying more debt than ever before. It's, you know, depending on the numbers we see in the press, it's somewhere around 167, 168, up to 170.
Ted Michalos: Every month it's a new record.
Doug Hoyes: Yeah it's a new record. So, you know, if you're listening to this two months in the future then it probably is in the 170 range. So, first of all when I'm talking about 170 what am I talking about there, what does that mean?
Ted Michalos: So, let's say your paycheque is a thousand dollars, if it was a thousand dollars, it means you owe $1,700 against it.
Doug Hoyes: Yeah and we're talking annual numbers so if you made $10,000 in a year.
Ted Michalos: You'd owe $17,000.
Doug Hoyes: You'd have $17,000 in debt.
Ted Michalos: And the average Canadian household I think is something like $45,000 a year, which means the average Canadian probably owes closer to $85,000.
Doug Hoyes: Well and we see it in our stats and we probably will be releasing our new Joe Debtor study in the spring of 2017 and we'll have a show or two on that. But we know that our clients are carrying more debt than the average, somewhere around $60,000 and that's unsecured debt.
Ted Michalos: That's credit cards, lines of credit, that's the expensive stuff.
Doug Hoyes: Yeah this 168% number that we're quoting, that's all debt, that's all forms of debt. That includes mortgages. So, a lot of people aren’t too worried about that because oh well, my house has gone up so I can have a huge mortgage if my house has gone up. But I mean we're seeing, and again tell me if I'm wrong here, but with the people we're dealing with and trying to help, are living pay cheque to pay cheque. I mean isn’t that really the big issue for a lot of people?
Ted Michalos: Well, that's exactly right. I mean we have access to all sorts of stats. The Canadian Payroll Association is saying that half of working Canadians now live pay cheque to pay cheque. And the reason for that is they're just overwhelmed by debt. They can't meet their regular financial obligations on one paycheque so I mean it's - there is no capacity to save, there's no capacity for anything to go wrong. It's just a dangerous scenario waiting to unfold.
Doug Hoyes: Well and I think you just hit the key point there, there is no capacity for anything to go wrong. If you're living pay cheque to pay cheque and it's a bad flu season and you're off for a week and don’t get paid, then that really throws you under the bus. It's very difficult to ever recover from that.
Ted Michalos: Yeah the scary scenario is that you've already got your credit cards maxed, something happens to your income, you get a new credit card in the mail and you run it up for the period of time that you're sick because E.I hasn’t started or you got no benefits 'cause you're working three part-time jobs. When you get back to work and you're making that regular pay cheque, now you've got more debt than you can service so you're - you had a problem, it went wrong and you've piled more debt on top of that and now every month there's a problem. It just gets continually worse.
Doug Hoyes: Well, so let's get into the practical advice section of this podcast then. So, what do you do when you're in a situation like that? And so, I'd like to talk practical but maybe we can wrap it up with our predictions too. So, we've got a new president coming in January of 2017.
Ted Michalos: Well, the U.S has a new president.
Doug Hoyes: Yes and the U.S and I assume -
Ted Michalos: The rest - or the world does.
Doug Hoyes: We're recording this before inauguration day so I don’t know what conspiracy theory will happen before now and then. And I'm actually going to do a special show second week in January where we talk about what the impact of new policies in the U.S could be here on Canada. So, we're not going to have a detailed discussion about that now. But of course everyone will want to tune in for that show. So, let's start with predictions for debt levels for 2017. So, do you expect them to go up, go down, what do you expect?
Ted Michalos: Up. I expect that every month we're going to continue to have new records for the levels of debt that Canadians are carrying.
Doug Hoyes: So, okay debt levels going up, which would seem to indicate that insolvency rates would go up but debt levels have been going up for the last many, many years and yet insolvency rates have fallen. What do you expect to see for insolvency rates in 2017?
Ted Michalos: Well, the saving grace for everyone has been that interest rates have been at historic lows. And again, I think that we've seen all the signs now that they're starting to increase. And it won't take a very big increases to cause dramatic impacts. So, overall what happens in the oil patch will make a big difference to insolvency rates across the country in Alberta and Newfoundland. I think they're going to go up in Ontario anyway. It may only be moderate but I would expect to make 3% to 5%. So, we're going to look at 125,000, 130,000 people next year becoming insolvent.
Doug Hoyes: So there you go, you have the prediction. Well, turn in in a year and see how close we got on that number. And ultimately I guess it really doesn’t matter how many insolvencies there are in the country and in the province, what really matters is to the person listening to us today, what can they do, what concrete actions can they take for 2017?
So, we are sitting here saying to ourselves we're entering a period of uncertainty, we don’t know what oil prices are going to do, which has an effect on the country, we don’t know what real estate prices are going to do. Are they going to keep going up, are they going to flatten out? On the real estate show with Ben Rabidoux a couple of weeks ago we talked about the possibility that the Ontario government introduces a foreign buyer's tax. And that could certainly depress the real estate market in the Toronto area. So, we don’t know what's going to happen. Obviously if any of those things do happen, that'll have a major impact on what goes forward.
But let's forget about the world, let's talk to the individual person who's listening to us today. We're in this uncertain time, real estate might go up, it might go down. Unemployment may be higher, employment might be soft, interest rates might go up. So, with all that uncertainty what do you suggest to your clients when they're sitting down with you? What should they be doing to prepare for 2017?
Ted Michalos: Well, you know what? It's a start of a new year, everyone should focus on themselves and their family. So, do a self assessment, figure out where you're at right now, look into your personal crystal ball and say where do you think you're going to be in six months or a year, where do you want to be in six months to a year?
Just about everybody listening is probably carrying too much debt. We get to sound like broken records on this but you need to find a way to deal with your debt, make sure that it's manageable, don’t increase the level of your debt, do what you can to reduce it as much as possible. The wild card for a lot of people this year is going to be at what point do you lock in your variable rate mortgages? If you've been doing a variable mortgage for the last three or four years, you've saved a lot of money. It's getting close to the point where now you should be thinking about locking them in because I think interest rates are going to rise. Of course as we said earlier, we've been saying that for three years now.
Doug Hoyes: And we don’t really know. And I guess the counter-argument to that would be well if the real estate market is going to get soft and you still want to be owning the house you live in in a year or two, the advantage of a variable rate mortgage, assuming it's an open mortgage at the same time, which is not necessarily a valid assumption. But if it's an open mortgage, well you can cash it in at any time. You can sell the house, no big deal. If you're locked in for five years then obviously there's some form of penalty. So, the bottom line is reducing debt, that's the main thing anyone can do.
Ted Michalos: Do a self assessment, figure out - I mean if you're already feeling tight, figure out what you need to do to get looser, to give yourself some elbow room in case something goes wrong. 'Cause I've got news for you, something always goes wrong. Maybe a little thing, maybe a big thing but you have to plan for these contingencies, for stuff that you think is unexpected 'cause there's going to be something.
Doug Hoyes: Excellent. Well, thanks Ted. I think that's good advice. We don’t know exactly what will happen in 2017 so I agree, I think the best approach is to expect the best but prepare for the worst. It's never a bad idea to reduce debt. House prices won't go up forever.
So, if you have more mortgage debt that you can handle, particularly if you were to lose your job, now is a good time to look at moving to a more affordable place to reduce your costs. If you've got unsecured debt like credit cards and bank loans, well same advice. Take steps to reduce it because if interest rates can go up your costs can go up significantly.
So, if you can't pay it off on your own, if you've got too much debt then well, get professional advice, that's what Ted and I do. Full information is available on our website at hoyes.com we'd be happy to hear from you.
That's our show for today. Happy New Year and see you in 2017. I'm Doug Hoyes, with Ted Michalos, thanks for listening. That was Debt Free in 30.