Canadian Household Debt is too High
Posted by Guy Close on 12/18/2010
Guy W. Close -
The sky is not exactly falling, but Canadians are in a very risky place when it comes to the amount of household debt we continue to run up compared to our incomes, according to a source no less august than the Bank of Canada.
In a dire forecast this week, bank governor Mark Carney said: “Experience suggests that prolonged periods of unusually low (interest) rates can cloud assessments of financial risks. Low rates today do not necessarily mean low rates tomorrow. Risk reversals when they happen can be fierce: the greater the complacency, the more brutal the reckoning.”
Words such as “brutal” and “fierce” are not that common coming from a man whose job includes the need to radiate calm lest he damage the nation’s economic morale. If Carney is using such dire language, he must be worried indeed, and presumably that should also be cause for average Canadians to at least be quite concerned. We average folk, after all, are the ones driving the problem. Carney was reacting to information released by Statistics Canada Monday that shows we’re spending more than we can afford to at a record pace. For the period July to September, the ratio of household credit market debt — defined as the combination of consumer credit, mortgage and loan debt — increased to 148 per cent, up from 143 per cent the previous quarter, and from 146 per cent during the first three months of 2010.
So, statistically at least, we are spending $1.48 for every dollar we earn, the 48 cents being financed by means other than cash. Not only is this alarming on the surface, it’s especially so considering that we’re now running up more debt on average than our American neighbours, who are no slouches in that regard.
This troubling news comes at a time when consumer confidence seems modestly buoyed, enough so that retailers are predicting a successful Christmas season. A good Christmas for one sector generally means we all benefit, so three seasonal cheers are definitely due. Let’s hope this cautionary warning doesn’t take the wind out of consumer sales, at least not before the January blahs do so.
But clearly, many of us aren’t getting the real risk we face when low interest rates begin to rise. No one is predicting they’ll hit 20 per cent as happened nearly 30 years back. But an increase to 8 or 9 per cent would still be a huge shock to many of us accustomed to managing debt in whole or in part thanks to the low cost of borrowing and debt maintenance. What’s the prescription? Don’t overextend on that mortgage or line of credit? Reduce the limit on that credit card? Revisit the old-fashioned notion of buying a starter home? There are no surprises here. We all know what we need to do to live within our means, but we don’t seem significantly motivated to do so.
Perhaps it will take an interest rate spike for reality to hit home. But that’s an awful lot of pain and suffering that could be avoided if we collectively gave our heads a shake.
Submitted by Guy W. Close
Investment Advisor
Desjardins Financial Security
705-444-8486 guy.close (at) sympatico.ca
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